Jobs are great for people who like eat food and buy things, but too many jobs are bad for people who like low rates. And when the labor market is being closely watched by the Fed as a cue to consider a policy shift, too many jobs are also bad for stocks. While it’s debatable that a job count of 263k (vs 250k forecast) qualifies as “too many,” it’s more than enough to hurt both sides of the market.
In fact, the quintessential “Fed accommodation trade” has been the broader theme for most of 2022 with stocks and bonds losing ground together from March to June, gaining together into early August (weaker economic data and hopes that CPI surprises were behind us), and have been losing ground aggressively since then as econ data and inflation refuse to play nice.
There are a few different ways to look at job creation depending on the case you want to make. If you prefer to say the economy is better than a lot of people think, you might point out that NFP continues to run well above the historical highs:
If you wanted to be a bit more pragmatic about why the data might be surprisingly strong relative to historical norms, you’d probably want to take a longer-term moving average that accounts for the entire post-covid time frame, thereby capturing the damage initially done in 2020 as opposed to the outsized bounce that followed. That moving average leaves NFP closer to historical lows (although this line will continue moving up simply because we’re about to ditch the ugliest post-covid months from the 3-year equation here in about 6 months).
Because of “yeah buts” like that, I’d prefer to point out economic resilience with the least likely suspect of all: GDP. Taking a longer-term average of GDP shows that, although there is negative momentum more recently, the 2 and 3 year averages are normal and stellar respectively. The only real “yeah but” to offer to the following chart would be to say the green line never made up for the 2020 dip, but then please be sure to note that it didn’t make up for the financial crisis dip either. We only really saw a very small corrective surge in the 1 year average–far FAR smaller than the current example.
The fact that we’re even able to make any case for ongoing economic resilience is evidence that things aren’t nearly bad enough for the Fed to break character in the current play where Jerome Powell is cast as Paul Volker’s ghost of stagflation past, blessed with the opportunity to go back in time and learn from the mistake of cutting rates too soon after the first sign of moderating inflation. In other words, there’s a very high bar for weak economic data and lower inflation readings to sway the Fed from its intention to hike and then hold the Fed Funds rate at higher levels for as long as it possibly can. That’s why the market is immediately willing to sell off on a jobs report that was only 13k higher than expected and more than 50k lower than last time.