Capital markets perspective: Come on down

Capital markets perspective: Come on down 


By far the best situation for the jobs market is to absolutely nail the ratio that compares the number of job seekers to the number of available jobs at precisely 1.00. If you can do that, then the nation’s workforce is free to move about the cabin with confidence because they know the chances of being re-hired if they leave their job are pretty good – and that’s productivity-enhancing in all sorts of ways. On the other hand, if the ratio falls too far (or lingers for too long) below that number, it puts the job market at risk of a deep freeze. 

But there’s also out-sized risk associated with running above the 1.00 number: When there are far more available jobs than the number of would-be applicants to fill them, employers suddenly find themselves engaged in a bidding war for talent, pushing wages higher to secure enough workers to operate their business. And that’s inherently inflationary – something for which the current economic mood has little tolerance. 

That’s why last week’s labor market datapalooza started out so promising: Tuesday’s JOLTS report showed that the number of job openings dropped to just over 8 million in April,1 the lowest since the height of the pandemic. Just as important, this steady decline in new postings has also been accompanied by a slower (but almost as steady) rise in the number of unemployed persons which has conspired to allow the number of available jobs per unemployed person to inch its way back toward where it “should” be (that is, as close to 1.00 without going over). In another positive sign, the so-called quits ratio – the willingness of workers to leave their jobs and therefore a clean measure of employee confidence – remained pegged at 2.2% for a sixth consecutive month. That’s still high, but nonetheless a much-needed cooling from its post-pandemic peak (and all-time record) of 3%, when job-hoppers were fleeing their places of employment in droves for annual pay increases of 16% or greater – more than twice the rate earned by those who stayed put.2 

So far, so good: The welcome cooling that was obvious in Tuesday’s JOLTS report was well-received by markets, primarily because it helps take some of the burden off higher interest rates to finally kill off the last stubborn vestiges of inflation. Wednesday’s payrolls estimate from ADP and Thursday’s layoff tally from Challenger, Gray & Christmas were also mostly benign,3,4 and if you had somehow ended the trading week on Thursday morning, you’d have had yourself a pretty good week, with equities generally higher and interest rates generally lower. 

But then came Friday, and with it a big upside surprise in payrolls: The U.S. economy created 272,000 new jobs in May, well ahead of April’s revised estimate of 165,000 and the 180,000 expected by economists.5 That undermined much of the optimism expressed by markets earlier in the week, and both stocks and Treasury bonds sold off as investors once again re-calibrated their views on rates and the likely direction of Federal Reserve policy.

But it didn’t last, at least not for large-cap stocks, which turned higher scarcely an hour after the hotter-than-expected payroll number initially caused them to gap lower on Friday morning. The reason for the reversal may have had as much to do with some of the details inside Friday’s release as it did with the somewhat contradictory result that the headline unemployment rate actually ticked higher – reaching 4% for the first time since January 2022 – despite the big payroll number.  

For example, some skeptics were quick to point out differences between the so-called “establishment survey” (which the BLS uses to generate payroll estimates) and the “household survey” (which it uses to generate unemployment numbers). The latter has been objectively weaker than the former, which foots well to consumer surveys suggesting that employees are increasingly worried about job stability. Others pointed to minute details of the payrolls estimation process as a way to explain away hotter-than-expected payroll growth and to justify the reaction by big-cap stocks.

If that’s really what’s going on, then maybe some of the optimism introduced earlier in the week by Job Openings and Labor Turnover Survey (JOLTS), ADP and the Challenger surveys might have been justified after all, because it suggests that the big payroll print is less than reliable and the labor market is indeed finally reacting to the Fed tightening. But here’s the interesting part: Although big-cap equities were able to stage a rebound on Friday morning, Treasury markets were not – two- and 10-year yields finished Friday significantly higher – a clear indication that bond investors weren’t nearly as forgiving of the payrolls beat as stock investors were.

I’m fascinated by data inside Friday’s jobs report that hints at a significant cooling of specific portions of the labor market that are most tuned in to the economic cycle. For example, based on our own back-of-the-envelope analysis, hiring activity in cyclically oriented sectors like auto manufacturing, travel and leisure and temporary help services seems to be plateauing as other, less cyclically oriented sectors continue to grind higher. 

So the bottom line with all this labor data seems to be that trends are still muddled. How you choose to interpret last week’s numbers data probably says more about your pre-conceived notion of whether or not the Federal Reserve has stuck the (soft) landing, or if the inevitable recession is simply taking longer to arrive given all the COVID-related distortions that are still quietly reverberating across the economy. There were certainly data on the wires last week to support either conclusion.

Is that enough to allow the Fed to consider following the lead of its G-7 peers like the Bank of Canada6 and the European Central Bank7 with a test-the-waters loosening of policy as they both did last week by cutting rates by a quarter point? Probably not.

What to watch this week 

This week’s big event will be Wednesday’s Federal Reserve rate decision and post-meeting press conference. Traders overwhelmingly believe that the evidence regarding inflation is simply not convincing enough for the Fed to follow the lead of the Bank of Canada and the ECB to become the third G-7 central bank to cut rates so far this cycle, but the Fed will have at least one fresh datapoint to factor into its deliberations – Wednesday morning’s Consumer Price Index print. (Unfortunately, Thursday’s Producer Price Index will arrive a day too late.)

For what it’s worth, I see little reason to disagree with that consensus. The Fed will almost certainly keep rates on hold and Powell will almost certainly continue to say what he’s been saying for a long time – namely that progress has been made and labor markets are returning to proper balance, but the economy is still strong and there’s still no urgency to cut rates.

But on the other hand, it’s becoming increasingly clear that labor market internals are softening and that consumer spending is decelerating. If you believe as I do that these are two of the last remaining redoubts standing between economic growth and contraction (or even outright recession), then at some point it becomes appropriate for the Fed to test the waters with a single, small cut – or at least more clearly signal its intent to do so. After all, a single cut says “we’re serious about this” without committing the Fed to future action – it’s really the second, third and fourth cuts that represent the point of no return. So while I still think it’s too early for that particular pivot, I’m willing to admit that barring a significant upside surprise in Wednesday’s CPI, I would be perhaps somewhat less shocked if something in that general direction were to come out of this week’s meeting – most likely a subtle shift in tone suggesting a more dovish attitude.

Beyond Wednesday’s decision and updated CPI/PPI data, this week will also feature two important sentiment indicators: the National Federation of Independent Business’ small business optimism survey on Tuesday and the University of Michigan’s mid-month read on consumer sentiment on Friday. While these two surveys differ in scope and focus (one polls only businesses while the other polls only consumers, for example), they have at least one thing in common: Both have recently shown that attitudes about the future vary widely – small businesses leaders are feeling far more stressed about what lies ahead than large-enterprise CEOs, for example. Data this week may show that this split is widening. 

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Tom Nun, CFA


Tom Nun, CFA, Portfolio Strategist at Empower, works alongside teams overseeing portfolio construction, advice solutions, portfolio management, and investment products and consulting.

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