Today’s highly-anticipated jobs report was an absolute blowout. 📈
The U.S. economy added 528,000 jobs in July, and the unemployment rate dropped to 3.5%, well above Wall Street expectations for 258,000 jobs. 💪
While some preliminary economic data hinted at a softening labor market, today’s report pretty much negated all of that. ❌
Although strong jobs data is positive news for the economy in that the current “recession but not a recession” environment may not be as bad as some are making it out to be, it just made the Federal Reserve’s job a hell of a lot harder.
The Fed has been trying to bring down demand since inflation is well above its 2% target. However, it is once again staring down the barrel of a major supply issue. The labor force participation rate remains below pre-pandemic levels, and the number of job openings outnumbers available workers by nearly 2 to 1. 😮
The tight labor supply is driving up wages, which rose 0.5% MoM and 5.2% YoY. Since wages are a sticky input cost, they’ll continue increasing pressure on overall inflation. 🔥
And since the Fed cannot control the supply of labor, oil, or other major inflation drivers affected by structural economic issues, its only choice is to continue its war on demand.
Essentially, the Fed will try to break the economy just enough to bring down prices towards its 2% target. That should mean lower growth and a weaker labor market, but we’re not seeing those effects just yet. 🔨
As a result, the Fed will likely stay aggressive at its next few meetings. That vibes with much of what we heard from various Fed Governors this week and what the bond market is now pricing in.
It also means that the stock market will have to rethink its recent rally. Part of the rebound in tech stocks was driven by hopes that the Fed would have to become more accommodative beginning early next year. But…the job market clearly messed with those plans.
We’ll have to see how the market adjusts to this change in expectations over the next few trading days and weeks. 👀
For now though, good news for the economy may be bad news for the stock market. 🙃