NFP numbers came in…
And it was bad…
Nonfarm payrolls increased 194,000 last month, the smallest advance this year, after an upwardly revised 366,000 gain in August, a Labor Department report showed Friday.
The unemployment rate fell to 4.8%, partly reflecting a decline in the size of the labor force.
Average hourly earnings jumped.
In short, this is what happened last Friday. It was a complete disappointment regarding the numbers of jobs created during September.
When you think the economists expected a 500,000 increase… What a joke. But let’s not bully them. After all, we wrote a complete thesis with solid examples which proves that you may predict every macroeconomic report right on the dot and still don’t turn a profit in the markets. (I will leave a link to the article here)
The calm before the storm?
Before the NFP numbers, we had an average week, except for a selloff on Monday. Bonds didn’t do anything spectacular, while stocks, especially the tech sector, recouped some of its early losses.
We anticipated this calm market as every fund manager and investors expected the NFP report.
This report was highly expected as it could provide a more concrete sign whether or not the Federal Reserve will start tapering as soon as the next meeting.
In summary, a strong NFP proved that the labor market is on the right path of recovery and the economy can walk on its own, without Quantitative Easing. After all, the Fed’s goal is to reach maximum employment.
On the other hand, a bad NFP, like the one we got, would give a mixed signal, as investors will not be sure if the Fed will taper anyways because they are scared of inflation or will continue the stimulus era.
Fed members already came out and admitted that inflation is more persistent than they early thought. We still can’t be sure if they remain dedicated to their full employment goal or will do their best to avoid inflation.
Friday’s NFP offered a more mixed signal, as the number of jobs created was very low while the unemployment rate somehow managed to fell.
How did the markets receive these mixed signals?
At the beginning of the trading session, tech stocks led the gains on Friday as the poor payrolls figure eased concerns the Federal Reserve would move rapidly to remove monetary stimulus.
As fund managers and traders better analyzed the report, they realised that these mixed signals won’t make the Fed change its mind towards starting tapering. There are two major reasons here:
- Previous NFP number was revised higher
- They struggled so hard to build a consensus that the taper should start as soon as November meeting that a change of mind could have some negative repercussions
- Lately, they have been focused more on inflation as it got more persistent than previously expected
Therefore, investors realised that the weak NFP may not stop the Fed from starting the taper. As a result, after a good start for the major indices, they ended the day lower as bond yields skyrocketed.
In conclusion, what is the Fed going to do?
In all honesty, we don’t know.
There are many factors to be considered by the Federal Reserve and all we got are mixed macroeconomic signals. After all, they are the policy-makers and our team is formed just by investors and traders. We don’t really have any insight on how they want to manage this situation. Our team will wait for the CPI report and hope that it will offer a better insight on where the economy is sitting.