Investors Sullen Over Resilient Economy

Stocks fell at the open after the Bureau of Labor Statistics released its latest jobs report (see below). At the moment, the Dow is down 590 points and the S&P is down 2.6%. Bonds sold off this morning as interest rate expectations rose. Traders are busy baking in more Fed rate hikes. The 2-year Treasury yield climbed to 4.3%.

Job growth remained strong last month, with payrolls rising a better than expected 263,000. The unemployment rate actually fell back to 3.5%. Wage growth held steady at 5%, as did the average workweek (34.5 hours). The underemployment rate—already very low at 7%—fell to 6.7%, the lowest since 1969. Good news, right? Yes and no. A strong job market means strong consumer spending, which accounts for about 70% of our economy. You can’t really have a recession with such a strong job market. Unfortunately, however, the Federal Reserve and investors will greet this report with consternation. While Fed rate hikes (and time) have successfully brought down asset prices and commodity inflation, they have not yet successfully cooled the labor market. Fed Chair Powell has clearly stated that this needs to happen before monetary tightening can pause.

That’s not to say the labor market is bulletproof. There are some signs of slowing labor demand. Yesterday’s report from research firm Challenger, Gray & Christmas revealed that US employers announced plans to cut about 30,000 jobs last month, up 46% from prior month levels and 67% from a year ago. In addition, the survey found that employer hiring intentions fell to the lowest level since 2011. Separately, the number of unfilled job positions has declining. Jan Hatzius, Goldman Sachs’ chief economist, says there’s no evidence of a “wage-price spiral,” which is the Fed’s biggest fear. But while we’ve “made substantial progress” toward the Fed’s goal, investors are worried that it’s not happening fast enough to suit the Fed. We’re definitely looking for another .75% rate hike next month, with .50% more in December.