Wages up, stocks down. Equities fell this morning following the release of the March jobs report, in which investors learned that nonfarm payrolls rose 431,000 last month vs. 490,000 expected. It was the lowest number of jobs added since September 2021.
And though jobs “missed” significantly, many investors were hoping for an even smaller payroll gain. The reason being that economic weakness – specifically, weakness in US labor – may cause the Fed to slow the pace of its rate hikes in the coming months.
As we observed several weeks ago, the market is now firmly back in “bad news is good news” territory. Today’s miss of 60,000 jobs, which certainly qualified as “bad news,” was completely erased by a 72,000 job upward revision to February payrolls. Over the last two months, jobs were revised higher by 95,000 total.
Unemployment fell to 3.6% as a result, dropping below the estimate of 3.7%.
But the biggest disappointment for bulls came by way of hourly wages, which climbed 5.6% year-over-year vs. 5.5% estimated. Bottom-line, the March jobs report didn’t seem bad enough to dissuade the Fed from hiking rates as planned.
“The payroll number was slightly lower, but that was offset by an upward revision to the previous month. The wage numbers were higher than expected. That raises more concerns about wage inflation and this means that the Fed has the green light to go 50 basis points in May,” said Miller Tabak’s Matt Maley.
Other analysts missed the point completely.
“With some sentiment indicators in the US pointing in the wrong direction, the jobs data also came in weaker than expected, but not as bad as many would have feared given the backdrop,” Neil Birrell, Chief Investment Officer at Premier Miton Investors, said.
“Job vacancies are still being filled and wage growth remains robust, suggesting that the economy is in good shape. That is the case for now; the key will be the impact on the jobs market and broad economy as rates jump higher and growth slows.”
For investors, it’s all about the rate hikes themselves, not jobs or the economy as Birrell incorrectly explained. The market fully expects that the Fed will give up on its hiking schedule within the next few quarters as evidenced by the recent yield curve inversions. The most recent being the 30-year/2-year (2s30s) yield spread, which flipped negative this morning for the first time since 2007.
If the Fed sticks to its guns and aggressively raises rates another 6 times this year, stocks will undoubtedly collapse. Nobody will be worried about the “impact on the jobs market and broad economy” if their nest egg gets flushed down the drain.
That’s part of the reason stocks continued sliding today, along with the fact that they just enjoyed a massive late-March rally.
More gains could soon be on their way, of course. But until we see signs of life from bulls, buying the “micro dip” of the last few days may not be the wisest decision. The March Consumer Price Index (CPI) is coming out on April 13th.
March’s wage growth data implies that we’ll see a hotter-than-expected CPI reading when it’s released.
Keep in mind that inflation is excluded from the “bad news is good news” mantra of the last few weeks. The higher inflation goes, the more the Fed will want to raise rates.
And that had bulls scared-stiff following this morning’s jobs report, which certainly favored short-term bears. If CPI misses significantly on the 13th and shows a smaller-than-expected inflation gain, expect sentiment to swing strongly bullish once more.
Until then, though, be wary of “bull traps.” Because a retracement to the recent lows could be waiting for the major indexes next week, especially if the war in Ukraine heats back up as US officials are claiming it will.
