Capital markets perspective: Could it be?

Capital markets perspective: Could it be? 


The number of jobs available in the U.S. shrank from almost 10 million in September to 8.7 million in October.1 At the same time, a small uptick in labor force participation allowed unemployment to actually decline from 3.9% to 3.7% in November, while payroll growth was a relatively moderate 199,000.2 Finally, the number of layoffs reported by Challenger, Gray & Christmas fell year-over-year in November for only the second time this year,3 even though the year-to-date total remains elevated. 

Those kinds of results probably should’ve been positive for markets because they provide evidence that the Fed’s method is working: The labor market is coming off the boil, but doing it in a way that doesn’t necessarily imply widespread job losses.  

So all told, this is one of the more convincing set-ups for the soft-landing scenario than we’ve seen in quite a while, and yet the market’s reaction was underwhelming. Equity markets popped higher when the JOLTS report detailing the number of job openings was released on Tuesday, but the gains didn’t hold. Ditto for ADP payrolls on Wednesday, and the week-over-week returns for most of the equity indices I follow for this report were as weak as they’ve been since Halloween.   

So what gives? If the likelihood of a soft-landing suddenly seems to have increased – even just a little bit – shouldn’t the cheer have been a resounding one? Well, there are probably a few reasons that wasn’t the case. First, investors seem to have been betting on a soft landing since around the beginning of the year, when markets – especially higher-growth segments like tech stocks and “the magnificent seven” – started rallying again. Except for a brief interlude during the third quarter of 2023 (when riskier assets declined notably), at least some investors seem to have embraced the soft-landing thesis aggressively and voted with their risk budgets, meaning markets may have already fully reflected that optimism long before last week’s labor data was issued.   

But it’s also possible that the raft of jobs data we got last week wasn’t quite as supportive of this theory as advertised. For example, an interesting comment about the U.S. job market last week came from ADP’s Chief Economist Nela Richardson, who suggested that the wave of post-pandemic hiring by restaurants and hotels was mostly over.4 Indeed, depending on how you do the math, at least half (and as much as 70%) of the jobs added to U.S. payrolls on a net basis since the end of the COVID recession in April 2020 have been in leisure and hospitality. Using pre-pandemic employment as a yardstick, that category is now very close to fully staffed. Without this L&H tailwind to pad the numbers, it seems possible to me that job creation more broadly could go from “comfortably moderate” to something less supportive, even negative. That would of course put a big dent in the idea that the U.S. can continue to offer new jobs indefinitely, even in the face of dramatically higher interest rates. (Also notable: Wage growth in leisure and hospitality occupations remains faster than other job categories by a wide margin.)  

Other interesting takeaways from last week’s labor data occurred far below the headlines. Take, for example, temporary employment. For many businesses the incremental worker isn’t on the payroll at all but instead borrowed from a temp agency on a contract basis. And deep down inside last week’s non-farm payrolls release was news that temporary employment declined by around 14,000 last month,5 which may not sound like much, and in the grand scheme of things, it probably isn’t (in total, U.S. payrolls number nearly 130 million).  

But on the other hand, declining temp employment has correlated fairly closely to the economic cycle since the Bureau of Labor Statistics began collecting such data in the early 1990s. Specifically, November marked the 12th month in a row that temporary employment has declined on a year-over-year basis; only once in that period – briefly in mid- to late-2016 – has so a consistent a decline in temporary employment not been associated with an economic recession. Add to that the insight from Challenger, Gray & Christmas that fewer seasonal workers have been hired this year than during any other holiday season since 2013,6 and it’s easy to imagine these small declines in the labor market turning into something with more impact. 

But for now at least, we’ll take last week’s almost perfectly soft labor market data – and the market’s wait-and-see response to it – at face value. 

Beyond the reams of jobs data discussed above, the only other macro data point worth exploring in these pages was Friday’s consumer sentiment survey from the University of Michigan.7 In recent months, consumer sentiment weakened back toward cycle lows as inflation expectations shot higher. This felt a little strange to me given that gasoline prices – historically a key determinant of consumer attitudes (and certainly a factor in their views on inflation) – have declined consistently since the end of last summer.  

But that trend reversed itself last week as overall sentiment soared while views on inflation dropped dramatically. The same environment that spurred last week’s relatively benign jobs market data probably helped enable the reset, but it also seems fair to assume that a continued decline in gasoline prices – which has steepened so far in December – might also finally be having its traditional impact on how consumers feel about the future. 

So there you have it: A benign and much-needed softening in the labor market – together with a gasoline-fueled increase in consumer sentiment – became the most convincing argument I’ve heard in a while that the Fed may have indeed achieved the dream of a soft landing. But if returns are any guide, markets seemed tentative by choosing not to rally in a big way on the back of supportive data. 

What to watch this week 

This week on Wednesday, we’ll learn the decision on rates by the Federal Open Market Committee (FOMC), the rate-setting body of the Federal Reserve. The overwhelming consensus among traders is that the Fed will remain on pause during its last scheduled meeting of 2023; given this week’s soft labor data, there seems little reason to challenge that assumption.  

However, it’s worth noting that the members of the FOMC will have access to several data points on inflation that have yet to be seen by anyone: consumer prices (CPI) on Tuesday and producer prices (PPI) on Wednesday (that’s also when the Atlanta Fed will also issue its latest update to business inflation expectations). If anything could sway the Fed’s decision on Wednesday, it would be an unwelcome spike in any one of these data releases.  

That seems like a long shot. Without some exogenous shock, inflation seems well on its way back to the Fed’s long-term target of 2%. It won’t be overnight, and it won’t necessarily occur in a straight line, but we’re approaching a point where the Fed seems very likely to declare this inflationary episode over. 

That leaves two open questions as likely to set the capital market agenda for the remainder of 2023 and into 2024:  

  • How long will the Fed keep rates high? (Markets currently expect as many as five rate cuts next year, with the first to come as soon as May 1.)
  • Will the tightening already in the pipes cause the U.S. economy to tip into recession? 

The only clarity we’re likely to gain into either of those two questions might be gleaned from the post-decision press conference by Fed Chair Jerome Powell on Wednesday afternoon. Given recent speeches by Powell and other Fed officials, I would expect Powell to double-down on recent efforts to throw cold water on market speculation for rate cuts in early 2024. While markets would love to hear anything to the contrary, Powell has repeatedly warned that he is particularly nervous about repeating “past mistakes” – a not-so-veiled reference to previous inflationary episodes where the Fed began cutting too soon, thereby re-igniting inflation and forcing an even more restrictive stance that would have otherwise been necessary. 

In terms of the real economy, there is little on the calendar for the remainder of this year that seems likely to help solve the riddle of whether or when the U.S. might finally tip into recession. This week’s retail sales figure for November is perhaps the most interesting release on tap for the rest of this year, because it will provide insight into how staunch the various headwinds aligned against consumers are truly blowing, not to mention how generous holiday shoppers are likely to be this year.  

Beyond that, look toward Thursday’s weekly jobless claims for evidence that the labor market is truly softening in an orderly fashion as was suggested by last week’s data, as well as Friday’s flash PMIs for insight into how the manufacturing and services sectors are holding up as 2023 draws to a close.  


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[5] Ibid.

[6] Ibid.

[7], American Automobile Association and Bloomberg

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