Traders work on the floor of the New York Stock Exchange (NYSE) on November 2, 2023 in New York City.
Spencer Platt | fake images
Friday’s market reaction to the jobs report boils down to a simple premise: Bad news is good news, as long as it’s not that bad.
Stocks rose sharply after the Labor Department said nonfarm payrolls rose by 150,000 in October — 20,000 less than expected, but a difference largely attributable entirely to the auto strikes, which appear to have ended.
For the Federal Reserve, relatively weak job creation, coupled with wage increases nearly in line with expectations, adds up to a scenario in which the central bank really doesn’t have to do anything. You can just keep letting the data flow, without having to change interest rates while you evaluate the impact of your previous 11 increases.
“The Fed finally got what it was looking for: a significant slowdown in the labor market,” said Mike Loewengart, head of model portfolio construction at Morgan Stanley’s Global Investment Office.
“We’ve seen one or two lies in this direction before, but the fact that this report followed other weaker-than-expected economic data this week may encourage investors who have been hoping for a less hawkish Federal Reserve,” he added. .
Markets reacted in more ways than one to the report. Fed funds futures traders reduced the probability of a December rate hike to less than 10% and now expect the first cut to come in May, according to CME Group tracking.
That cut could actually be bad news, however, as it would likely signal the Federal Reserve’s concern that the economy is slowing so much that it needs a boost from monetary policy. Slow, controlled growth is something markets and the Federal Reserve are looking for in the current climate, but negative growth is not.
“Investors who are eager for the Federal Reserve to cut rates should be careful what they wish for,” Michael Arone, chief investment strategist at State Street Global Advisors, said in an interview earlier this week.
Despite market pricing, it appears that cuts are not around the corner if recent statements from Federal Reserve officials are any indication. Federal Reserve Chair Jerome Powell said Wednesday that cuts have not been part of the conversation among policymakers.
“It seems like it’s still a long way from my mind,” Richmond Fed President Thomas Barkin said during an interview Friday on CNBC’s “Squawk on the Street.” “You could imagine scenarios where demand declines and something needs to be done. You could imagine a scenario where inflation is starting to stabilize and you want to reduce real rates. Both of those imaginary things still feel pretty far away.”
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