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Inside the Broker - Goldilocks jobs number

Inside the Broker

Goldilocks jobs number

It’s fair to say that most investors lost interest in the US Non-Farm Payroll (NFP) numbers during the first twelve months of the pandemic. But the same could be said for all economic releases. Quite simply, the volatility in the data sets, and the difficulty of reading anything into either month-on-month or year-on-year comparisons, meant that data, whether on employment, inflation, or anything else, was meaningless. Instead, everyone, from the medical profession to financial analysts and normal citizens, quickly became experts in deciphering death rates and R-numbers.

Big miss

But the last few months have seen a gradual return to normality, not in the actual data releases which continue to exhibit some volatility, but in their importance to investors. Quite simply, it’s now possible to make more sense of the numbers. This became apparent last month when we saw the market reaction to a very disappointing Non-Farm Payroll number. On the first Friday of May, and following on from an unexpectedly strong March release, the forecast was that the April payroll number could top 1 million in monthly gains. It wasn’t to be. In fact, payrolls rose by just 226,000 – an astonishingly large miss. In addition, the prior month’s data was revised down by nearly 150,000. In other words, it was a mess.

Uneven recovery

But what was the market reaction? A sharp rally in equity markets and other risk assets, along with a sell-off in bond yields and the US dollar. The weak data helped to confirm everything that members of the Federal Reserve had been saying for weeks: the economic recovery may be strong, but it was uneven. There was still a shortfall of around 8 million lost jobs since the start of the pandemic. Consequently, the US central bank wasn’t yet ready to even talk about tightening monetary policy by tapering its monthly bond purchase programme, let alone planning it.

Inflation picks up

Now, it just so happened that stock markets declined sharply at the beginning of the next week as all eyes switched away from unemployment and began to focus on inflation once again. After all, if one part of the Fed’s dual mandate (maximalising employment) was still a work in progress, how was the other half (ensuring price stability) working out? On Wednesday investors got an answer – not very well. The headline Consumer Price Index (CPI) hit its highest level since September 2008, during the Great Financial Crisis while Core CPI (which excludes food and energy) was the highest since 1996, a time of great inflation. Stock markets were already in decline by the time the CPI number was released. But the jump in CPI saw another selling spasm as investors feared the Fed would have to tighten monetary policy sooner than expected. But members of the central bank were quick to insist that the jump in inflation was transitory, and it wasn’t long before equity prices steadied and began to pick up again.

Transitory or persistent?

The Federal Reserve reckons this bump in inflation is transitory, given the deflationary effects of the pandemic and the efforts to counter these. Members of the central bank also say that even if inflation proves persistent, they have the tools to control it without causing a market crash. We shall see. It’s worth noting that despite all the monetary loosening that followed the financial crisis, the world’s central banks failed to generate enough inflation to hit their 2% targets. But this time round we have governments stepping in and providing huge dollops of fiscal stimulus as well.

Weak payroll numbers

Last Friday brought the latest NFP update. Once again, the release fell short of the consensus estimates. Once again stock markets rallied while bond yields and the dollar declined. For equity markets this is proving to be a Goldilocks scenario. Jobless numbers are coming down, but not fast enough to frighten the horses. Going into the new week markets are quiet with very little overnight movement, in contrast to last month’s sell-off. But now investors are looking ahead to this Thursday’s US CPI release. The consensus is that Core CPI should rise 0.4% month-on-month, following April’s jump of 0.9%. If so, inflation is continuing to pick up, but at a much-reduced rate. A lower-than-expected inflation increase should prove positive for risk assets. But if, once again, the CPI comes in much higher than expected then there’s a risk of a less favourable market reaction. In normal circumstances, Federal Reserve members would be on hand to assure investors that an inflation pick-up remains transitory. But there’s a monetary policy announcement on Wednesday 16th which means that there’s currently a blackout on commentary from members of the central bank.

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