Wall Street sees explosive jobs data as ‘wrong report at wrong time’

(Bloomberg) — The latest US jobs report snuffed budding optimism that the US economy was weakening enough to warrant a slower approach by the Federal Reserve in its battle against inflation.

Most read by Bloomberg

Hiring beat estimates and wage growth accelerated more-than-expected last month, upending expectations that had built up on Wall Street in recent weeks. S&P 500 futures plummeted, the dollar soared and Treasury yields soared.

“Double earnings expectation is a problem,” said Bryce Doty, senior vice president of Sit Investment Associates.

Here’s what Wall Street said:

Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors LLC:

It looks like it should be bad press for the markets. The core figure was strong and there are clearly lingering wage pressures, but the domestic and core components were quite weak. This suggests that the Fed can’t really ease too much, but growth continues to deteriorate.

Victoria Greene, founding partner and chief investment officer of G Squared Private Wealth.

The addition of jobs came as a bit of a shock. A bit of a surprise given that there have been so many announced tech layoffs and hiring freezes. This, of course, means the Fed can remain fully focused on inflation.

Jay Hatfield, managing director of Infrastructure Capital Advisors:

Definitely a strong working relationship. This is pretty much what I would have expected… We believe, however, that the 17% drop in the money supply translates into a very strong dollar, high mortgage rates and falling commodity prices. We expect inflation to fall rapidly despite the strong labor market as there is a 5% energy hemorrhage to the core. For example, airfares are heavily dependent on oil prices.

Mike Bailey, director of research at FBB Capital Partners:

This is exactly the wrong report at the wrong time. Investors started to feel comfortable after Powell’s remarks on Wednesday that we had a favorable downward path towards the end of the year. However, today’s hot job numbers put a pin in that balloon. To be fair, my hunch is that investors and the Fed will be paying much more attention to the next inflation data point (CPI) that comes just before the Fed’s rate decision.

Seema Shah, chief global strategist at Principal Asset Management:

Having 263,000 jobs added even after policy rates were raised by about 350 basis points is no joke. The job market is hot, hot, hot, and the Fed keeps raising key rates. It will not have gone unnoticed by Fed officials that average hourly earnings have steadily strengthened over the past three months, exceeding all expectations and heading the absolutely wrong direction to what they were hoping for.

Yes, it’s good that the US job market is so robust. But it is terribly worrying that wage pressures continue to grow. Powell himself said earlier this week that wage growth will be key to understanding the future evolution of core inflation. So what is in this employment report to convince them not to take policy rates above 5%?

Scott Ladner, chief investment officer at Horizon Investments:

There is only 1 way out of this (*in the Fed framework*) and that is to continue to set policy to squeeze the demand side, but we have yet to see any progress on that front. This makes a policy error by the Fed almost a certainty, if it wasn’t already.

Cliff Hodge, chief investment officer at Cornerstone Financial:

While the payroll number was strong, the payroll data will be eye-popping for the Fed. The monthly payroll growth number of 0.6% hit its highest level for the year. Higher wages fuel higher inflation, which will no doubt keep pressure on the Fed and should raise expectations for the terminal rate.

We have received no help from the participation rate, which continues to move in the wrong direction and will keep competition for labor high until the economy inevitably flips over next year.

Peter Tchir, head of macro strategy at Academy Securities:

The big news is earnings! Last month it was up 0.5% instead of the original 0.4% and this month it is up a whopping 0.6% (versus 0.3% expected). The Fed won’t like it.

Dennis DeBusschere, founder of 22V Research:

Very strong — very — and in contrast to everything we’ve seen on the work side. Everyone was asking that bad economic growth was bad for incoming markets – you don’t have to worry about that today. This was too strong and is bad for risky assets. We don’t think this changes the outlook for economic growth at all. It is clearly slowing down and will continue to do so. The risk is that we have more downside/financial conditions than the S&P 500 to ensure that a slowdown occurs.

–With assistance from Emily Graffeo and Peyton Forte.

(Updates with comments by Ladner and Hodge)

Most Read by Bloomberg Businessweek

©2022 Bloomberg LP

Leave a Reply

Your email address will not be published. Required fields are marked *