The market is always at least somewhat irrational … but any action attached to the latest jobs report and impending rate hike is just downright stupid.
The market knows the Federal Reserve is going to start tightening. Indeed, it has been just over the horizon since at least the taper tantrum of 2013.
The market hates uncertainty, but there’s nothing terribly uncertain about this.Does it really matter if it happens this month — or in October or December when the rate-setting committee meets again?
It’s going to happen.
Furthermore, we’re talking about a rate hike of — wait for it — a quarter of a point.
The wisdom of crowds might be BS, but this is ridiculous. The reality of a tiny rate hike — and the beginning of a tightening cycle — should be plenty baked in by now. The market is supposed to be forward-looking, isn’t it?
But here’s what’s even more doltish about the market moving on the eventuality of a rate hike: Stocks are actually moving on the August jobs report because it was good enough to make the case for higher rates sooner rather than later.
And yet as much near-zero rates have underpinned the bull market, everyone is better off if stocks rise on economic growth rather than just free money.
Stocks are on far more solid ground when they rise on corporate earnings growth rather than on speculation fueled by cheap borrowing costs.
A Jobs Report for the Rate Hawks
A quick look at the August jobs reveals economic improvement. That’s good news — even if it makes a strong case for a September rate hike.
True, the headline number of the jobs report came in light, but it’s the trend that matters here. Nonfarm payrolls growth slowed to 173,000, missing economists’ average forecast of 200,000. More importantly, the employment figures for June and July were revised higher.
At the same time, the unemployment rate fell to 5.1% from 5.3%. That’s a pitch down the middle for a rate increase because the Fed considers such a level to represent full employment.
To be sure, there were some mixed figures in the August jobs report. Wages rose, but only by 2.2%. That’s essentially in line with the underwhelming growth we’ve seen in previous jobs reports.
The participation rate is still very low, but that may be partly a reflection of demographic changes. There are still 8 million unemployed job seekers and 6.5 million part-time workers looking for full-time work, but then these, too, are significant improvements year over year.
It was a solid enough showing that if the Fed puts off a rate increase this month, it won’t be because of the jobs report. The rate committee might stand pat because of weakness in the Chinese economy, but that doesn’t make much sense. Strength in the U.S. economy should more than offset any ill effects from China. Indeed, China’s economy has only a 16% correlation to the U.S. economy, and is therefore insignificant, according to David Rosenberg, chief economist and strategist at Gluskin Sheff.
So, yeah, the market is being moronic in light of the facts, and for that you can largely blame the Federal Reserve Open Market Committee.
The FOMC has done a poor job of telegraphing its intentions. Voting members are publicly at odds over monetary policy. That’s absurd. It’s undisciplined and fuels market volatility.
But the market is ultimately at fault here. A rate hike is coming. The tightening cycle is foregone conclusion. A month here or a month there is immaterial. And — again — a quarter-point increase will still leave rates near historic lows.
The volatility triggered by the jobs report/rate speculation is great news for fast-money traders. For the normals, it’s just tiresome.
Dear FOMC: Hike the damn rate, already.
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