Initial Reaction to Jobs Report Signals End of Bizarro World in Stock Market

For the last year and a half or so, when it came to economic data such as the monthly jobs report that was released this morning, market watchers, traders, and investors have been stuck in a weird bizarro world where good was bad and bad was good. Things like low unemployment, high levels of job creation, and strong wage growth that were, on the face of it, good things, have become bad in terms of their implications for the Fed’s fight against inflation. This morning, though, the initial reaction in equity futures to another strong jobs report for April suggests that those days may be behind us.

Non-farm payrolls, the number of jobs in the economy, increased by a higher-than-expected 253k last month, with an unchanged unemployment rate of 3.4%, the lowest since the massive boom in the 1960s. Meanwhile, earnings increased at an annual rate of 4.4%. That would be a strong report in pretty much any circumstances, but at a time when the Fed Funds rate has risen from 0% to 5% over a fairly short period, it is a remarkable one. In the not-too-distant past that would have prompted a market collapse. Not this morning, though, where twenty minutes after the data hit the tape, stock index futures are trading just a little higher than they were going into the release.

Clearly, something has changed. A strong jobs report is no longer seen as a reason to sell aggressively. Why is that and what does it mean for investors?

The positive reaction to data that would have prompted the exact opposite just a month or two ago is the result of one of two changes of heart. Either traders don’t believe that the Fed will see them as a reason to hike again, or that if they do, it won’t push the economy into a damaging recession. Or there is a third and more likely possibility -- that it is a bit of both.

The tone of Jay Powell’s remarks this week definitely indicated that the majority view on the FOMC was that after a period of rapid jumps in interest rates and the fact that the effects of such things take time to show up in the data, a pause right around now would be a prudent move. If that is the thinking, then this report doesn’t really change things. The previously presumed direct correlation between wage rises and inflation just doesn’t seem to be showing in the numbers this cycle. The jobs market has remained tight, even as core inflation has slowed, so this morning’s data aren’t a reason to shift from the FOMC’s newfound relative dovishness.

There was also evidence this morning that while unemployment is low and wages are rising, those things are happening in a controlled way, with no sign of overheating. The last two months’ non-farm payroll numbers were revised down, taking them to levels of job growth that are basically seen as neutral, the natural rate of job growth in the kind of steadily growing economy that is the Fed’s ultimate goal. Given the aforementioned time lag between rate hikes and their impact, that is exactly where the Fed wants to be at this point, so again, no reason not to pause.

The there is the fact that based on this report and other evidence over the last month or so, even if the Fed does hike another quarter of a point or so next month, the economy can bear it without collapsing into a recession. That is where we have been for a few months now, with U.S. consumers and businesses taking these interest rate increases in stride.

Of course, there have been a few exceptions to that, most noticeably regional banks, but as Powell pointed out this week, that is a banking issue for which there are specific tools to solve and not indicative of a broader economic issue that should impact interest rate policy. One can even make a case that the regional bank problems are actually a product of the ultra-low rates that came before rather than the hikes. That is the environment that encouraged lax lending standards and an overabundance of some assets at what now look like inflated market valuations, so adjusting back to a more “normal” interest rate environment is necessary for the long-term health of the monetary system.

Mainly though, what this morning’s jobs report and the initial market reaction to it says to investors is that the bizarro world where good is bad and vice versa is over, or at the very least on pause for now. That means that we no longer have to search for hidden meaning in every data point and can take numbers and trends at face value for a while. That doesn’t really change the economic outlook, but it will come as a welcome relief to a lot of people, myself included.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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