Will a Weak a Jobs Report Still Be Positive News?

Some anxiety about interest rates lifted on Thursday, triggering a market rally. But no new data or economic developments supported the positive response. All that happened was that a Fed member made speculative comments that no rate hike would be needed if inflation readings were favorable. He wasn’t suggesting that inflation was under control or that we were likely to see a good jobs report. Friday morning we will have some actual data to consider, and it is not at all clear what will be considered positive news.

Nonfarm payrolls are expected to add 53,000 jobs in August versus a loss of 23,000 jobs in July. The unemployment rate is expected to hold steady at 4.1%. Recent reports have been weak and there have been downward revisions as well.

These weak reports have been a market positive because they were anti-inflationary. The market has not been worried about slowing economic growth, due in part to booming corporate earnings. Fed Chair Warsh has commented he isn’t concerned about the recent payroll numbers.

There has been a shift recently as inflationary pressures have increased. Bonds have been under pressure, Fed members are split over a hike at the next meeting, Japan’s central bank is signaling a rate increase, the European Central Bank is expected to hike next week, and government bond yields in the UK and France are at multi-year highs.

The Stagflation Problem

Today’s news is more complicated because a weak jobs report may be more than a driver of softer inflation. There is growing concern that economic slowing is underway. The combination of slowing growth and higher inflation produces the most dreaded phenomenon in economics, which is stagflation.

Stagflation is a particularly difficult problem because the Fed has few tools to deal with it. Raising rates helps to cool inflation, but it cuts growth. Cutting rates helps growth but produces inflation.

That is why the potential reaction this morning is the opposite of what people are used to. Through 2024 and 2025, a weak payroll number meant rate cuts and a relief rally. Now a strong print is the hawkish outcome, because it gives the Fed room to hike into persistent inflation, and a soft print takes the September hike off the table but raises the growth question. The market will have to decide which reading it wants, and it may take more than the first hour to settle.

What Warsh Already Told Us

Warsh addressed this at Jackson Hole. He said labor markets are quite stable, that 4.1% unemployment remains low by historical standards, and that employment gains are naturally going to run low in a market consistent with full employment.

That means that a soft print will not influence him much, and it means the number that matters for the Fed is CPI is on September 11 rather than anything this morning. Waller said the same thing Thursday with his comment about inflation. So the jobs report matters for positioning and for the market’s read on growth, but it does not matter much for the September meeting.

One Detail to Check

The unemployment rate fell to 4.1% in July for the wrong reason. The labor force shrank by 264,000 and household employment fell 87,000, with participation dropping to 61.4%, the lowest level outside the Covid period since the mid-1970s. A steady unemployment rate this morning could again mean fewer people looking rather than more people working, and that distinction matters when measuring economic health.

Game Plan

With an event of this sort I don’t try to bet on what the market reaction might be. I want to watch the price action and let it settle before I make any major moves. There may be some volatility to trade, but the bigger issue is whether the news impacts the recent negative trend that has been developing. We still have negative seasonality and few positive catalysts to boost the market. I see little opportunity to make any big moves.

At the time of publication publication, DePorre had no position in any security mentioned.