If you’re confused about why the stock market jumped today despite more evidence of the labor market weakening, we’ve got you covered. 👇
Earlier this week, we discussed several leading indicators suggesting the U.S. labor market is returning to pre-pandemic levels. That’s big news because a historically tight labor market has been keeping upward pressure on wages. And since wages tend to be sticky, that puts upward pressure on services inflation, which has been the hardest part of inflation to bring down.
Total nonfarm job openings fell earlier in the week, bringing the total number of job openings per available worker down to a 1.5:1 ratio vs. a 2:1 ratio at its peak. And Wednesday’s ADP employment report showed just 177,000 jobs were added in August vs. the 200,000 expected. 🔻
And finally today, the August nonfarm payrolls number came in at 187,000 vs. the 170,000 expected. Although it beat estimates, June and July’s numbers were revised considerably lower.
However, the big story was the unemployment rate jumping from 3.5% to 3.8% as more people returned to the job market. The labor force participation rate rose to 62.8%, its highest level since the pandemic began in February 2020. 🧑💼
As for wage pressures, average hourly earnings rose 0.2% MoM and 4.3% YoY. Hours worked rose slightly to 34.4, making it a mixed bag.
But overall, the evidence is building that the labor market is getting weaker, which the stock market interprets as bullish. The thesis is that if the labor market weakens, so will inflation, pushing it further toward the Fed’s 2% long-term target. And if that’s happening, the Fed is unlikely to raise rates further. ⏸️
Rates staying at current levels (or falling) would be a positive for stocks because they become more attractive on a relative basis. It also makes it easier for companies to raise capital to grow their businesses, improving their stock prices over the long term.
So, to conclude, sometimes bad news for the economy is seen as good news for the market. And this is one of those times. 🤷