Jobs Report Spells Disaster For The QQQ ETF (NASDAQ:QQQ)

Friday’s job data has sent yields moving sharply higher, as revisions from last month were stronger than previously reported. The news will weigh heavily on the technology-ladened Nasdaq 100 and the NASDAQ:QQQ ETF. Potentially pushing the ETF back to recent lows and lower over time.

March’s job data came in largely as expected, rising by 431,000 vs. estimates for 490,000. At the same time, the unemployment rate fell to 3.6% vs. forecasts for 3.7%. Wage growth was eye-popping at 5.6% y/y vs. estimates for 5.5%, while m/m came in as expected at 0.4%.

But it was the data from last month that was the most shocking, with non-farm payroll revised up to a gain of 750,000 vs. a prior report of 678,000. Additionally, wage growth in February also was more substantial than expected, rising by 0.1% m/m versus a previous report of 0%, with y/y climbing by 5.2% vs. 5.1%.

Shifts In Yields

The revisions have shifted the yield curve dramatically, with the five-year TIP rate rising from -90 bps to -78 bps. The entire real yield curve moved up sharply. This shift higher in real rates is enormous and pushes many of these bond yields to cycle highs. This shift in the curve is very likely to have a negative impact on the Nasdaq and QQQ ETF (QQQ). The relationship between the technology-heavy QQQ ETF and the real yields has been robust and negatively correlated.

Since 2018, when real yields decline, the Nasdaq ETF has risen. When inverting the chart of the Nasdaq with rates, it’s very easy to see the relationship between falling real yields and a rising Nasdaq 100 ETF.

Another way to look at this relationship is by comparing the TIP ETF to the QQQ ETF. In this case, the relationship is positively correlated and easy to track for those with access to TIP rates. However, a minimal deviation occurred in the final two weeks of March, but that could now be closing, which would mean the QQQ ETF would need to fall back to the TIP ETF.

Even Higher Rates Coming

The job revisions tell us that the labor market is running stronger than previously thought, and that likely means the Fed will only need to be more aggressive given the rises in inflation rates that show no signs of cooling. The ISM prices paid index also came out today and was much stronger than expected, coming in at 87.1 versus estimates for 80 and higher than last month’s reading of 75.6. The CPI report will be scorching when reported in two weeks.

Fed fund futures have repriced higher following the massive amount of data today, with the contracts for December rising by 13 bps to 2.375%. Yields across the curve will have to increase even more in the days and weeks ahead, and real yields will also need to push higher.

QQQ Breaking Down

With the pressure mounting on the Fed to raise rates, the repricing in real rates will be a significant weight on the QQQ ETF. Just yesterday, the QQQ broke below the significant uptrend that formed off the March 14 lows. This channel break suggests a downside risk to the QQQ ETF and that it could retrace in the very short-term back to $353.

Meanwhile, the earnings yield of the Nasdaq 100 vs. the 10-year risk-free rate of return has fallen to just 55 bps, which is the lowest level since 2010—suggesting that at this point, the Nasdaq is significantly overvalued vs. bonds. The current paces of yield gains and the Nasdaq can’t both co-exist. The higher rates go, the more expensive stocks will get on a relative basis. The pressure on equities will only grow worse.

The job report and ISM manufacturing report confirm that the Fed remains deeply behind the curve and will need to tighten rates higher and faster than previously thought. With every piece of new data released, we find that rates need to rise even more. Overall this remains terrible news for stocks, and specifically the QQQ ETF.