VTI - Yes This September Nonfarm Payrolls Report Supports The Soft Landing Narrative

2023-10-06 14:22:23 ET

Summary

• The September nonfarm payrolls exceeded expectations, with 336,000 jobs created and the unemployment rate remaining unchanged at 3.8%.
• The market initially reacted with a selloff, but that later turned into a rally as the report confirmed a soft landing in the labor market.
• Wage gains slowed to 4.2%, reflecting job growth in lower-paying industries and reducing inflationary pressure.
• If inflation is falling without serious carnage in the labor market, then a soft landing is occurring. Plain and simple.
• While ample risks could derail positive sentiment from today's rally on a hot report, positive seasonal factors suggest a year-end rally is likely.

Some people see the glass half full. Others see it as half empty. I see a glass that's twice as big as it needs to be.

- George Carlin.

This morning's September nonfarm payrolls came in white-hot at about double the consensus expectation of 170,000. The reading of 336,000 jobs being created for September exceeded the most optimistic expectations for job creation. The specifics of the report are below:

• Nonfarm payrolls increased by 336,000, with Hospitality & Leisure and Government showing the most significant gains.
• Bars and restaurants comprised the majority of gains in Hospitality and leisure.
• The unemployment rate stayed unchanged at 3.8%.
• There was no impact on payrolls from the UAW strikes in this report.
• Wage gains slowed from an annual pace of 4.3% to 4.2%, likely reflecting that many jobs added last month were in lower-paying industries.

The market initially reacted with a sharp selloff, and yields spiked. By lunch hour, what started looking like a vicious selloff turned into a nice rally, complete with the S&P VIX Index (VIX) falling 4% at 12:27 p.m. and the Nasdaq and Russell both up north of 1%. The expectations were for a soft report that showed a slowdown in hiring, particularly after the private sector ADP report came in at only 89,000 earlier in the week.

There were reasons to expect a weak jobs report. Still, in the end, economic strength in the labor market appears to have been greater than even the most optimistic economist forecasted. Indeed, many expected a hiring slowdown and a focus on economic weakness would be a problem.

Now, the concern would appear to be the opposite; at least, that was the concern when markets first opened. But this report seems to confirm that a soft landing is underway because jobs are being gained, and labor participation is high and steady. Yet, the wage gains are slowing and do not appear likely to reignite inflationary pressure.

Nobody predicted a super-hot report, and those who discussed it thought it would play out very differently. Even seasoned market minds who discussed the prospect of a hot report were utterly wrong about how the market would respond to one. For example, consider this quote from Scott Wapner's program on CNBC yesterday:

Yeah, I'm usually the guy that comes in and says ignore the economic data. It's already priced in. I think in this case if we get a jobs report that contradicts the little bit of relief we got in ADP in the middle of this week then I think you're going to make new year lows in all the new indices. I really think it's if this, then that. And it's as simple as that.

Josh Brown, Ritholtz Wealth Management.

I am a big fan of Josh Brown's analysis, and while I don't always agree with his take on markets, I know he's a knowledgeable guy who does his homework. Frankly, yesterday, I would have agreed with his take. We look at the price on a screen like it is one thing. It was changing at the whim of some unforeseen invisible hand. But the price is one of the best pieces of information you have because it reflects so many different decisions in one piece of information.

The price may be one thing on your screen, but it is the sum of billions of decisions and transactions. So, the lesson is not that Mr. Brown is a lousy commentator; it is that the market humbles us all with its collective wisdom that inherently transcends what we can comprehend from the individual perspective. And I think the market took time to process the report and saw precisely what I saw: stark evidence of a soft landing. As you can see below, the recent rise in rates has not been because of inflation anyway; it's more about increasing term premia, which is way overdone .

The analysis leading up to the report was a perfect case study of what happens when the crowd uses heuristics about second-order thinking to substitute for actual second-order thinking. In the market, various catchphrases tend to spread like wildfire and substitute the complex critical thought necessary to achieve alpha and a leg up over the crowd. "Good news is bad news" is one such aphorism that may have shreds of truth, but it also requires an underlying understanding of why to preserve intellectual dexterity.

Firstly, let's dispel the assumption that the Fed doesn't want you to have a job right now. I'm sure Fed Chair Jay Powell and even the most hawkish members of the FOMC want you to have a job. It builds character and self-esteem. It puts money in your pocket. They want you to have a job for the same reason that old Mom and Dad encouraged you to get one. They don't want workers to have too high a degree of bargaining power in the market relative to employers because they can push up wages fast enough to reignite inflationary pressure. The Fed is trying to avoid a wage-price spiral, not trying to get you fired.

But suppose the high labor costs don't lead to higher prices, and workers' ability to demand higher wages declines. In that case, you have the best of both worlds: falling inflation without the collateral damage of adverse dislocation in the labor market. So, this report confirms that a soft landing is indeed possible. Not only that, job growth appears to be driven by consumers at the lower end of the income spectrum, and labor participation has stayed at high levels, always a tonic for nervous hawks.

When the market opened down, I was going to write that this was a buying opportunity. However, the market beat me to it. I can't stress this enough: I think a market rally on a scorching jobs report is a significant positive and, in some ways, a more bullish outcome than I could have imagined. I think markets will rise from here, and Q4 will live up to its seasonal strength.

Risks and Where I Could Be Wrong

Look, there were definitely some angry bears this morning who thought they were about to cash in. That doesn't mean they're wrong about everything. The rising debt obligations of the United States and the potential for these levels to crowd out private sector activity are becoming more real by the day. At the same time, it may urge the Fed to make "higher for longer" last for less time than the market currently expects.

The backdrop of political chaos in one of America's major political parties that could further gum up calcified political alliances that make reform difficult makes the problematic debt situation all the more ominous. Another significant risk is that the UAW strike could cause some economic dislocation. The following risks could derail any market rally, though:

• Escalation in Ukraine.
• Credit event (Junk bond spreads rising).
• Political Risk.
• Commercial Real Estate.
• Reignition of the banking crisis.
• The lag effect of high rates/Fed policy error.

Furthermore, inflation forecasts have been rising from economists. If they are correct and inflation isn't defeated, we may have much more volatility ahead of us, and the prospect of a Fed policy error rises dramatically.

So, while the rally on the jobs blowout counter to expectations is very bullish and makes me want to buy, there are certainly no shortages of serious risks to contemplate. Any one of them could derail a rally and make the year end on a sour note. Still, I think it is likelier that we climb a wall of worry and end the year on a high note.

Conclusion

We forget that Mr . Market is an ingenious sadist , and that he delights in torturing us in different ways.

Barton Biggs.

This morning's actions surprised a lot of folks, myself included. Nonetheless, your conclusion from the herky-jerky market action this morning is ultimately bullish. While the jobs number was hot, it did not indicate that wages would reignite inflationary pressure. So this turns "good news being bad news" into just plain good news. It also paves the way for the coveted White Buffalo of financial markets, a soft landing.

Supply and demand is a seemingly simple concept, but it can be challenging to understand on a macro level when the labor market is involved. Like the price, headline labor numbers reflect a prodigious and complex reality that doesn't lend itself well to being boiled down to one number. But beyond the headline number, we're really after observations about collective behavior. The behavioral indicators suggest that it would be difficult to ignite the type of inflation that the Fed fears most. It is even more difficult now that wage pressures appear to be alleviating.

If I am worried about a recession and I tighten my belt, but then the expected drop in demand doesn't materialize or demand increases, then not only have I likely expanded my margins. I probably need to hire an extra hand or two to help with all the business I didn't expect. I think this is what is going on in the economy, and I think countervailing forces make a soft landing likelier than recent rate angst would suggest.

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