IMCV - October Jobs Report - The Good The Bad And What It Means For The Market

Summary

• It's time to talk about jobs, as we just got the October non-farm payroll report after we got job openings earlier this week.
• The jobs report was strong enough to keep the Fed from becoming dovish. However, cracks are starting to appear as we could be in for weakness down the road.
• Traders are buying the market with both hands while the dollar is weakening.
• I remain cautious as all of this is bullish for inflation, making it unlikely that the Fed is going to pivot anytime soon.

Introduction

It's time to discuss an important macro topic: The job market. Today, the market got the latest job numbers for October, which came in much stronger than expected. Not only that, but wage growth also was higher than expected. This comes just days after the JOLTS job openings report showed very resilient labor demand. On the one hand, that's tremendous news, given the importance of labor in every economy. On the other hand, it's not the best news for investors and traders hoping for a short-term Federal Reserve pivot.

In this article, I will walk you through the numbers, my thoughts on the market, and everything related to that.

Why Jobs Matter (Besides The Obvious Reason)

The jobs market matters. That's an obvious statement. The higher the number of employed people, the better. However, when it comes to trading and investing, it's always important to understand the bigger picture, which goes well-beyond economics 101.

First of all, how often is this report released? In the case of the jobs report, we're talking about the monthly non-farm payroll report, published on the first Friday of every month by the U.S. Bureau Of Labor Statistics. This report is important because it tends to have a major impact on stocks.

However, more often than not, this impact is short term. That's based on several reasons. First of all, the jobs report is a coincident indicator. It tells us what is currently going on. A lagging indicator tells us what has happened (think of GDP numbers). A leading indicator tells us what's likely going to happen. Most professional investors and traders do not base their opinions on coincident indicators.

Also, this is a coincident indicator that is prone to regular adjustments. Almost every month, the prior-month data is adjusted.

With that said, the jobs report is still important. At least the job reports we got this year - and the ones we get going forward.

The reason is straightforward. We're in a situation where bad news is good news for the market. This year has become a year of high volatility and equity downtrends, as all major indices are down quite significantly this year.

This is caused by high inflation, supply chain issues, and an aggressive Federal Reserve trying to bring down inflation by aggressively hiking. Unfortunately, because the economy is weakening, the Fed has been hiking into weakness.

To give you an example, the Fed's favorite recession indicator - the 10-year yield versus the 3-month yield curve - is now in recession territory (below 0, meaning inverted).

Moreover, it has caused financial stability to deteriorate, which is needed to weaken economic growth. After all, the Federal Reserve can only impact the demand side of the economy. It cannot directly impact supply, which makes the situation so tricky.

Hence, investors know that once the jobs market starts to weaken, the Fed will be forced to pivot. That would be bullish and allow the market to rise again.

Based on that context, let's dive into the numbers.

How Was The October Jobs Report?

Non-farm payrolls came in at +261,000. This is well above the consensus of 193,000. The unemployment rate fell to 3.7%. The labor force participation rate dropped to 62.2%. Moreover, average hourly earnings rose by 0.4% compared to September. Economists were looking for 0.3% growth.

My experience from treasury departments, sell-side researchers, and funds is that investors tend to prioritize hourly wage numbers over total job changes. After all, wages have a bigger impact on inflation - and the Fed's policies.

The good news continues as job gains occurred in all major categories. For example, manufacturing added 32K jobs. Professional and technical services added 43,000 jobs, healthcare was up 53K jobs, while wholesale added 15K new jobs.

On top of that, on Nov. 1, the Labor Department's Job Openings and Labor Turnover Survey (the JOLTS) reported an increase to 10.7 million open jobs. The median estimate was 9.8 million.

The US economy now has 1.86 open jobs per unemployed worker. That's bad news for the market as this makes the Fed's job easier. Or as economist Eliza Winger put it:

Job openings failed to decline in September despite clear signs of slowing economic momentum, complicating the picture for a Fed looking to take excess heat out of the labor market.

The same goes for the non-farm payroll data. It does not give the Federal Reserve an excuse to stop tapering. Economic weakness is not bad enough to hurt labor demand. According to Bloomberg :

Fed officials have repeatedly emphasized that in order to meet their inflation goal, they need to bring labor supply and demand more into balance. Chair Jerome Powell, speaking after the central bank raised rates by another 75 basis points on Wednesday, said that job-market conditions haven't softened yet in an "obvious" way.

With that said, the report wasn't that great either. The October report was the worst since the pandemic recovery as weakening leading indicators are starting to affect the pace of hiring.

Moreover, layoffs are starting to accelerate. To quote the Wall Street Journal :

Several tech companies announced layoffs or hiring freezes this week as a result of the economic environment.

Amazon.com, Inc. said it would halt corporate hiring. Last month the company said it would stop hiring for its core retail division.

The payment processor Stripe Inc. said Thursday it would lay off 14% of employees. The ride-share company Lyft Inc. said it would cut 13% of staff.

Employers in the services sector were more cautious about hiring in October, according to surveys of purchasing managers released Thursday by the Institute for Supply Management and S&P Global. ISM said its employment index contracted slightly while S&P Global said hiring nearly stagnated.

Moreover, since March, the biggest job gains came from part-time jobs. Multiple jobholders also saw growth, which is a result of high inflation and the need for most people to make ends meet. The always-bearish folks at Zero Hedge have a fitting chart to display this development.

With that said, there's one more question to be answered.

Now What?

Job market numbers are tricky. The bigger picture is good. The market shows a clear desire for labor as job openings remain at 1.9 per unemployed worker. Monthly job gains were strong with support from all key sectors. Moreover, wage growth remains strong.

All of this will make it likely that the Fed will not pivot anytime soon.

This is what I commented on that after this week's Fed press conference:

"The biggest risk is that the market is faced with high inflation readings going forward, which will make Powell's (somewhat) dovish comments obsolete," he said. "An early pivot could make the Fed's job even harder as a weaker dollar would quickly fuel commodity prices, impacting producer prices and eventually consumer prices again."

Looking ahead, Nelissen predicted "the S&P 500 to remain in a very volatile sideways trend with a potential downside to the low 3,000 points range," a fact that "could force the Fed to pivot early next year."

While I discussed inflation readings, the same applies to labor.

With that said, the market is currently up 1.45% while I am writing this.

Despite a hawkish jobs report, buyers are returning.

The issue is that traders and investors are front-running the upcoming jobs report. Labor growth is weakening. Economic weakness is slowly but steadily working its way to labor demand. Moreover, most job gains came from part-time jobs. While wage growth was still good, these jobs are prone to economic weakness.

The dollar index is now down 1.5% while I am writing this. It's the result of traders who are pricing in a more dovish Fed.

Hence, in "hope" of more economic weakness in the months ahead, traders have started to buy.

My own strategy remains unchanged. I'm not chasing the market. I believe that upcoming inflation numbers will be able to keep a lid on trader optimism. Moreover, dollar weakness is helping commodities, making it even harder for the Fed to become dovish (as I stated in the quote above).

I'm increasing my savings rate to buy the stocks that I discuss on Seeking Alpha at great valuations.

Takeaway

In this article, we discussed the importance of labor market numbers in this market environment. Labor market numbers are too strong for the Fed to pivot, yet markets are pricing that in, anyway. After all, we do see some cracks in the labor market that could (very likely) translate to disappointing numbers down the road.

However, inflation remains a major issue, and any dovish bets hurting the dollar will make it harder for the Fed to pivot.

I remain extremely cautious. I will not chase the market at current levels but wait for buying opportunities in stocks that I frequently discuss on Seeking Alpha.

(Dis)agree? Let me know in the comments!

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