USMC - The March Jobs Report May Be A Massive Turning Point For The Market

2023-04-06 08:30:00 ET

Summary

• The March jobs data is expected to come out on April 7.
• The "Jobs Friday" report has proven to be a pivotal point in the stock market since November.
• If the job cycle continues stocks are likely to see a big drop in April.

The jobs data has become a pivotal point for stocks over the last few months. Since November, the jobs data has either worked to send stocks higher or lower until the following job report has been released. If the pattern persists, then the data for March should suggest that the S&P 500 heads lower into the beginning of May.

This job cycle pattern started on November 3, when the S&P 500 rallied until December 1. These dates are important because the job report came out the next day. The same thing happened again after that December 2 job report. The index sold off until the end of December and then rallied hard following the job report data from January 6 until February 2. February 3 was a solid job report, but this time it sent the market sharply lower until it bottomed on March 13, one trading session after the March 10 job report. The index has rallied again, which sets up this week's April 7 job report.

The Data Is Important

Could this be the job report that sends the S&P 500 lower until the beginning of May, or will this be the jobs report that breaks the cycle and sends the S&P 500 higher? Anything is possible, but largely, it depends on what the data supports. Analysts are looking for 240,000 new jobs created in March, down from 311,000 in February. Meanwhile, the unemployment rate is expected to remain unchanged at 3.6%. Average hourly earnings are seen rising by 0.3% m/m, up from a gain of 0.2% last month, while rising by 4.3% y/y, down from an increase of 4.6% last month. However, analysts haven't done a great job of predicting the jobs number, with the headline number coming in higher than estimates 11 months in a row. So a hotter-than-expected number would not be a surprise, while a miss would be a big surprise and support the idea that the labor market is softening and the Fed should stop raising rates.

Additionally, the unemployment rate and the number of unemployed workers may matter more at this point than the change in the non-farm payroll. The Fed has been working hard to balance the labor market, which means reducing and adjusting the number of job openings vs. the number of unemployed workers. That probably means the number of unemployed people needs to rise while the job openings need to fall. Currently, there are 1.67 job openings for every unemployed worker, based on the data as of February. This has been too high for too long, and the Fed wants to see this ratio fall back to where it stood pre-pandemic.

Therefore the number of job openings will need to fall, suggesting that the demand for labor is easing. The February data showed that the number of job openings fell below 10 million for the first since June 2021. Meanwhile, the number of unemployed workers is at the lows seen in 2019. Preferably, the Fed would like the demand for workers to come down and do as little damage as possible to the number of unemployed workers.

To this point, initial jobless claims have been relatively steady, suggesting that unemployment is likely to remain low and probably unchanged from last month.

Market Is Past A Fed Pause

The market is no longer trying to anticipate a Fed pause. At this point in the cycle, with the market pricing in rate cuts, the market will want hard and conclusive evidence that the Fed has finished raising rates, but importantly, that the Fed will be willing to make its first rate cut in September. Data that support more rate hikes from the Fed will not go over very well with the market currently. That means wages will need to show a deceleration in the month-over-month rate of change from February, which is not what the forecast calls for.

The cycle of bad news is good news is over. At this point, swapping over too bad news is bad news. This cycle started some time ago, and the market is shifting from applauding a Fed pivot to a cycle where the market will begin screaming for rate cuts. If the jobs report supports another rate hike in May is coming, it will probably not go over well with the stock market.

Based on analysts' track record and the trend in the data, along with initial jobless claims staying low, the March job report will probably support a rate hike in May.

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