Why Stock Futures Fell on Solid Jobs Data, And What it Means for the Market
I am sure a lot of people saw the weekly unemployment claims report this morning and were expecting a big jump in stock futures. After all, the number was better than expected, with new claims falling below 400k for the first time in over a year. However, if you look at that and are puzzled by the drop in stocks it is because you are looking only at the headlines, not at the full set of data released this morning.
Headline bias, or the tendency to react to headlines rather than the underlying story or data, is a problem in life generally. It is when people base their decisions on things that are in the news when, by definition, anything garnering headlines is a rare and exceptional occurrence. If it weren’t, it wouldn’t be in the news, and yet people ignore the unremarkable and mundane, and therefore more frequent and impactful things. It is why so many people are terrible at assessing risk, fearing flying while driving like maniacs or refusing to eat certain foods while drinking a bottle of wine with dinner, or whatever.
Traders, whose whole job is about risk assessment, are less inclined towards headline bias. The initial market reaction on releases such as this morning’s tends to follow the headlines, but once the dust has settled, much broader concerns dictate the reaction.
This morning, for example, the jobless claims were the news, and the market did trade higher initially. If you were following along on CNBC, Bloomberg News or Fox Business, you might have thought that was the end of it. The numbers sparked a lot of commentary that really amounts to no more than political propaganda. Some pointed to the fact that there are still 393k new claimants and used it as an excuse to blame the victims, asserting that the unemployed are choosing to be such, and are living the life of Riley on the $600 a week they are getting from the government; the modern version of the old “welfare queen” argument. On the other side of the aisle, the drop below an arbitrary round number was heralded as proof that the new president is transforming the economy, even though new claims are still worryingly high and continuing claims remain elevated too and the blame was laid squarely on the shoulders of greedy employers refusing to pay a fair wage.
What that ensured was that for viewers of financial news and entertainment channels, the focus remained on that headline release, even as traders turned their attention to a much less well-known but much more important report. The Bureau of Labor Statistics (BLS) released their revised take on productivity and costs for Q1 2021 at the same time as the weekly jobless claims hit the wire. When that news is taken into consideration, it is little wonder that the S&P500 E-Mini futures contract (ES) reversed quickly after an initial jump:
Right now, the market is much more concerned about inflation data than any political arguments about the nature of unemployment, and therefore are looking at productivity and cost numbers rather than the notoriously fickle weekly claims.
There is a mix of good and bad news there.
The good news is that, as usual, U.S. businesses are responding to hard times by getting better at what they do. Productivity increased by 5.4%, based on an 8.6% increase in output and a 3.0% increase in hours worked. The bad news, at least from a market perspective, is that to get that productivity increase, employers increased hourly compensation by 7.2%.
That is good news for those who received the extra money, and maybe it is good news for the economy overall. After all, if those who claim increased unemployment benefits are disincentivizing work are correct, that won’t be a problem for long since higher wages will lure people back into the workforce.
However, this could be bad news for stocks because it hints at real, rather than transitory, inflation.
Stocks have continued to climb in the face of higher prices because the feeling is that those price increases are the result of higher commodity and input costs, and the market will take care of that as higher prices prompt higher output. However, if the labor shortage results in competition for workers that forces wages and salaries significantly higher, that cost increase for business is a lot less elastic than input costs. Labor can be viewed as just another commodity market but, in the real world, it is hard to take back a pay raise. That means that there is evidence of possible lasting inflation and, if that is the case, the risk of the Fred changing course and increasing rates sooner rather than later.
That is what the market reacted to this morning when futures reversed.
It remains to be seen if the theoretical, distant threat of inflation is enough to derail the strong, consistent bull market that we have been seeing for over a year now. I suspect it won’t be for now, if for no other reason than that the Fed will probably say that this is only evidence of transient inflation. What this morning’s less publicized data will do, though, is bring the inflation risk back into focus. That could mean that we are in for a bumpy ride, so caution is advised for traders and investors for a few weeks.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.