Market crash concerns are running hot ahead of a crucial jobs report this Friday that will likely set the tone for the Federal Reserve’s upcoming rate-hike decision. Payroll jobs are projected to have increased by about 200,000 in November, a notable deceleration compared to most of this year. Surprisingly, however, slowing job growth may well be exactly what most economists are hoping for.
Inflation and unemployment tend to go hand in hand. Just this year former Treasury Secretary Larry Summers stated we would need one year of 10% unemployment, or five years of 6% unemployment to bring inflation down to reasonable levels. The relationship between unemployment and inflation has some strange implications for this week’s labor market reading.
In a bizarre twist of fate, this month, bad is good, and good is bad. A weakening hiring market will send a signal that the Fed’s tightening this year has begun to truly reverberate through the markets — potentially hinting at an impending drop in prices and more importantly, a less drastic monetary response.
Unemployment is a lagging economic indicator, a point exemplified in this year’s relatively strong jobs reports. Indeed, for most of the year, despite industry-wide slowdowns, the country has added upwards of 400,000 jobs a month, not exactly reflective of the recession some economists claim the country is in the midst of.
This time around, a softening jobs report would likely read as a strong sign that the Fed’s efforts this year haven’t been in vain — that inflation is already on the path downward. This could, in turn, nudge the Fed towards a milder rate hike in December — if they raise rates at all.
The Fed Rules the Markets, Data Rules the Fed
Data reports on jobs and inflation have proven major market catalysts this year. Just this month, when October inflation came in just 0.2% under expectations, the S&P 500 enjoyed its strongest trading day in two years, climbing more than 5%. On the contrary, poor inflation reports only stoke fears of a market crash. This is, of course, in no small part due to their relevance to the Fed’s monetary agenda.
Friday’s job report could be particularly strange in that a very good labor reading may actually push stocks down. Indeed, investors may opt to “sell the news,” understanding that strong job numbers would likely only strengthen the case for additional rate hikes.
Conversely, should jobs numbers come in cooler than expected, investors may buy up equities, hoping for a reversal of the Fed’s hawkish policies. Indeed, notions of a “Fed pivot” — the idea that some miracle data point will trigger the central bank into not only ceasing its rate hikes but lowering rates back down — have been floating around for much of the latter half of the year; much to the chagrin of Fed leadership. Indeed just about every Fed spokesperson has hinted at additional rate hikes to come, including New York Fed President John Williams, who, just this week outlined expectations for the central bank to maintain elevated interest rates for the next few years.
“Inflation is far too high, and persistently high inflation undermines the ability of our economy to perform at its full potential… I do see a point, probably in 2024, that we’ll start bringing down nominal interest rates because inflation is coming down.”
Market Crash Fears Heat Up Ahead of Rate Hike Decision
The Fed has, for better or worse, been the focal point of the U.S. economy in 2022. From equity markets to mortgage rates, the central bank has touched virtually every aspect of this year’s financial operations in significant ways.
Throughout the year, the Fed has focused all of its monetary powers on lowering inflation, regardless of the potential consequences. With 2% inflation as the goal, the central bank has been relentless with its rate hikes. So far this year the central bank has opted to raise rates six times, with the last four being massive, 75-basis point hikes. This is unprecedented by nearly any measure — the last time the Fed raised rates 75 bps before this year was in 1994.
When the benchmark rate increases, the entire economy feels it. As a result of the Fed’s hawkish policy, 30-year fixed-rate mortgages have climbed to over 7% this year, previously trending around 3%. Meanwhile 10-year Treasury yields have climbed from 1.5% to 3.7%. The stock market has also been quick to note the effect of the Fed’s tightenings with many companies reporting weaker-than-expected earnings straight off the back of higher borrowing costs.
As such, inflation readings, like the Consumer Price Index (CPI) and Personal Consumption Expenditures Price Index (PCE), alongside jobs reports, have carried substantial weight in the markets this year. Traders have been happy to panic buy or sell from even the most passé signals meaning this Friday’s jobs report could very well wipe away this week’s losses entirely — or add to them.
Friday’s job report is set to be the final data release before the Fed’s final Federal Open Market Committee (FOMC) meeting of the year, scheduled for Dec. 13 to 14. Expect scrutiny, plenty of speculation, and just maybe, an unemployment-induced market rally — or market crash.
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
