6/3/16
As we discussed earlier in the week, market participants are trained to be fixated on the monthly jobs data. That was evident in today’s market reaction, as it always is. The payroll number, the number professional investors have been trained to trade, was weak this morning. The unemployment number, on the other hand, was at best levels since November 2007.
In normal times, the jobs data is probably the single most informative data point, where you can see signals of heating up or cooling down in the economy. But of course, we haven’t been in a “normal” economy in a long time.
Still, in recent years, the U.S. jobs data has remained, bar none, the biggest single data point in the world. Why? Because the Fed explicitly told us that they wanted to see the unemployment rate at 6% before they would consider the first steps of removing emergency policies. And because the Fed was the Captain of the globally concerted policies that saved the global economy from an apocalypse, the Fed was also broadly depended upon to lead the world OUT of emergency policies.
But even after seeing dramatic improvements in the key jobs data that the Fed was targeting, meeting the target and then exceeded the target, they have still been very slow on the path of “normalization.”
Now they’ve told us the jobs data are in a good place, relative to their current policy position (i.e. rates should be, not normal, but quite a bit higher by now). But the Fed has run into other obstacles they didn’t foresee when they began their “jobs targeting” campaign: 1) they underestimated the deflationary impact of the global debt crisis, 2) somewhat related, they underestimated the lack of leverage on wages employees would have in dramatically improved job market, and 2) they underestimated the weakness in the global economy and the vulnerability of the U.S. economy to shocks outside of the U.S.
Broadly speaking, the Fed’s rate decision and, consequently, their message to the world about their confidence in the economy going forward, hasn’t been about jobs for a while. With that, the hyper-focus that market participants continue to give to the data every month seems to be wildly misplaced (for now).
So when we see a weak payroll number, as we did this morning, and the knee-jerk selling from the professional trading community sends stocks lower, Treasuries higher and the dollar lower, it’s probably a good idea to use those moves as opportunities to enter at better levels (i.e. buy stocks, buy the dollar, sell Treasuries).
If we step back a bit and think about the bigger picture, we have a Fed that is considering rate hikes because the economy is doing better (emerging from crisis and robust enough to withstand the removal of emergency policies).
And, as we said, the Fed is leading the way, globally. That is a very positive message for stocks and a very negative message for Treasuries (i.e. rates are going higher, prices will be going lower). As for the dollar, we have a Fed going one way, and Europe and Japan going a distinctly opposite direction (full-throttle QE). That’s squarely positive for the dollar as capital flows away from easing policies (Europe and Japan) and toward yield (U.S. assets).