Another first Friday of the month, another jobs report. By the time you read this the Bureau of Labor Statistics’ (BLS) monthly Employment Situation Summary for October may have been released diligently at 8:30AM Eastern Time on the appointed date. The stock market may be reacting and everyone will turn their attention to the Federal Reserve.
It’s a strange ritual which keeps financial writers busy. But does it mean anything?
If all goes as it should this one should really move the markets. Exactly which direction is hard to tell for a variety of reasons – but that is what will matter more than anything else if this report comes in as “good” (in quotes) as it should be.
Expectations for the jobs report are always based on the previous month. The report for September was lousy, coming in at a very weak gain of 142k. This goes against the average for 2014 of about 220k per month, maintained as recently as last June. Job growth appears to be decelerating badly.
Then again there is considerable evidence this is only a statistical aberration, as we have discussed before. The independent report by ADP came in last month at a weak but hardly devastating gain of 200k and for October a considerably weaker gain of 180k. If the BLS figures and ADP figures were to suddenly converge in this report we should expect a BLS gain of 240k jobs.
That won’t happen, but there may be a revision upward to September. They do this a lot.
Here is the problem for markets in general if the jobs report is as positive as the ADP report suggests it should be: it’s hard to tell if good news is really good news given the possibility of a rise in the Fed Funds Rate. No one knows exactly where we stand and the complications are nearly endless.
Everyone is waiting for liftoff – and not just the Federal Reserve.
We’ll start with the very strong performance of initial claims for unemployment, a real-time measure of how many people are being laid off. It’s still plumbing historic lows as a percentage of the workforce. As we said in June, however, that doesn’t mean hiring is coming along. Companies are clearly waiting for a signal it’s time to invest in a workforce which is ready for growth – which doesn’t happen until everyone is ready to grow and workers see upward pressure on wages which loosens their wallets.
The net decline in layoffs itself should be a net gain of about 35k jobs over September, all things being equal.
The stock market reflects this corporate culture, not sure whether an interest rate hike is a bad thing (harder money) or a good thing (a sign of a strong economy). It’s long been Barataria’s belief that a rise in the Fed Funds Rate should actually lower the benchmark 10yr Treasury Bill, and thus rates for everyone, but this is only likely over the medium term of a few months. The last six months? The 10yr has bounced between 2.00% and 2.50%, a massive swing, and currently sits right in the middle around 2.25%.
Stocks did swoon when Janet Yellen reiterated the plan to raise interest rates by December – but only a tiny amount. Despite a now 60% chance given by investors for a rate hike this year the market seems to be happy for now. This is all good.
An unusually strong jobs report for October is an easy mark to hit after the disappointing September, so we should expect it will be strong for many reasons. Let’s make a safe prediction of a 180k gain with an upward revision to 160k for September and everyone calls it strong. The case for a rate hike is probably made and the stock market will show its hand – is good news finally and for sure unalloyed good news?
We won’t have holiday sales figures for another month, so at this point we’re only going to be reading tea leaves. This is all we have to go on. A huge boost in consumer confidence, measured in holiday shopping dollars spent, would be the one thing which should propel us into a strong 2016 no matter what happens with interest rates.
A strong jobs report should cause the stock market to rise and, more importantly, the 10yr T-Bill rate to rise as well. But we won’t know what environment we are in until we see that market reaction over the next week – assuming the prediction of a called “strong jobs report” comes in. Are we ready for liftoff – not just from the Fed but from the economy as a whole?