Why the world’s largest economic data release pissed off the markets

US employment data came in weaker than expected on Friday.

This has been good news for the markets lately. Weaker employment data means looser monetary policy.

But this time, traditional commerce did not pay off.

What changed ?

US employment data was worse than expected – and markets didn’t like it

Once a month, every month, the collective eye of the market turns to non-farm payroll figures in the United States.

This is the largest data release on the US labor market. As we have already noted here, this is perhaps the most important publication of economic data in the world.

Why? The United States is still the world’s largest economy. What contributes the most to its economic growth? Consumption. Thus, the vitality of the American consumer is the most important component of the growth of the American economy.

And if there’s one thing that matters more than anything in supporting the propensity to consume, it’s job security.

So an American consumer with a paid job is good news for the global economy, and an underemployed is bad news.

That’s why everyone pays so much attention to numbers.

Now whether it makes sense that they can move the markets on an instant basis when released is a bit more of an open question. Unemployment figures are revised regularly.

You can get a shock report (very high or very low) and you will get a great reaction from the market on the same day. And yet, when you find out a month or two or three later that it was all a miscalculation, the market doesn’t tend to react, although the new data probably reflects things better than the bad data.

By the way, you can streamline it all. It makes sense for markets to react to new data even if it isn’t perfect, because that’s all they have. But let’s not get into the esoteric theory just yet. Let’s just accept that markets are noisy things and not always entirely rational.

Anyway, the latest numbers came out on Friday, and they weren’t very good. The prognosticators were betting on the addition of about 500,000 people to the payroll in September. The number came to just 194,000, the lowest reading this year.

Not only that, but people have left the workforce (not what employers want to see given they struggle to hire) while wages have risen at their highest rate since April.

Now there are times when you would expect the markets to like this. Why? Because if good employment reports are good for the economy, it also implies that interest rates may have to rise. All other things being equal, the markets are not fond of higher interest rates.

In recent years (in fact, for almost a decade), a disappointing jobs figure has been welcomed by markets as it meant monetary policy would stay lower for longer.

And at first, that’s how investors took it on Friday. When the data came out, the Nasdaq soared, as did gold. Still, they both ended the day down – the Nasdaq in particular.

So why change your mind?

The investment environment will change anyway

The problem for the markets today is that the Federal Reserve seems keen to at least start to “unravel” (that is, reduce the rate at which it prints money), and this report on employment is not low enough to warrant suspension.

Worse still, inflationary pressures remain strong. This is really bad news for the markets.

Rising inflation driven by a stronger economy could mean higher interest rates, but it should also mean better business income and profits. Costs (commodity prices and wages) could increase for companies, but productivity gains and increased sales could compensate for this.

But if you get both inflation and a weaker economy, also known as stagflation, it’s the worst of all worlds. Central banks around the world will have a hard time dealing with this problem, because it is theoretically not supposed to happen.

Of course, this is an employment report. As we noted earlier, they are revised regularly. And while the Fed might want to cut, that doesn’t mean it will be raising interest rates anytime soon (although central banks around the world are speaking much harsher than they were).

However, all of this leaves the markets between a rock and a hard place. Either things go well and we end up with a stronger economy and higher rates and higher inflation than in the past, or things go bad and we end up with a stagnant economy, but still struggling with the economy. ‘inflation.

Either way, it’s a very different environment from the “still on the brink of deflation” world we’ve been living in for at least a decade now. Which in turn implies that your investment portfolio will also have to be different.

We’ll discuss this in more detail at this year’s MoneyWeek Wealth Summit next month. We are currently finalizing the line-up and I can guarantee you won’t want to miss it. The deadline for early bird registration is fast approaching, so be sure to get your ticket now!

Until tomorrow,

Jean Stepek

Editor-in-Chief, MoneyWeek

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