Many are probably familiar with the following riddle: “When is a door not a door? When it is ajar.” That is some tired stuff, isn’t it? So, let me give you a new one: “When is a good Employment Situation report not good for the markets? When its strength allows the Fed to continue being aggressive in raising the overnight rate.” Ba dum tss.
Frankly, I like the one about the door better.
This morning, the Bureau of Labor Statistics (BLS) released The Employment Situation – September 2022. As I alluded in the first paragraph, there was little not to like. That is if you were hoping to find continued strength in the labor markets.
The BLS estimated the U.S. economy created another 263K net, new payroll jobs last month. This takes the 12-month total to just short of 5.3 million. That is greater than the entire population of Alabama. Further, the official Unemployment Rate fell to a miserly 3.5%. This was/is mere basis points away from the September 2019 50-year low. Further, there was decent strength across most major economic sectors with the exception of government.
For all intents and purposes, the report pretty much summed up what employers have been screaming all year: There are plenty of jobs for people who are serious about taking them. After all, the unemployment rate for college graduates is a mere 1.8%. Given the way the bureau collects the data, the true number might actually be less than that or even non-existent. Finally, the unemployment rate for all workers 25+ years old was/is 2.8%.
Trust me, these types of numbers are the exceptions and not the rules over time. One would think investors would like this evidence of economic strength and durability. Yes, one would think. However, we live in a bizarre new normal where nothing is as it seems. An American Cultural Revolution, if you will. So, not surprisingly in these surprising times, the markets are bleeding red ink on solid economic data.
The reason being the continued strength of the labor markets, coupled with stubbornly high inflation, will force the Fed to keep raising rates. The more it does so, the more expensive money is in the economy. The more expensive money is, the less people will borrow. The less people borrow, the less they will spend. The less they spend…I think you get the picture.
Essentially, there is no reason to believe the Fed will do anything less than a 0.75% rate hike at the upcoming Federal Open Market Committee (FOMC) meeting on 11/2/2022. This will take the upper target of the overnight range to 4.00%. More than likely, this will take the Prime lending rate to 7.00%. Whew.
Yes, 7.00% money in THIS economy when money was essentially free 12 months ago? Geez, that’s kind of a tough sell. Isn’t it? Yes. Shoot, let’s not forget that is the rate from the bank for people with good FICO scores. Meanwhile, the variable rates on credit cards are going through the roof. Let’s just say monthly minimum payments will be going up, up and away, although not in a beautiful balloon.
Going back to the jobs numbers. More people with more money to spend should be a good thing, shouldn’t it? Why would the monetary authorities want to slow down job creation and wage growth? That doesn’t seem real fair, at least not by my understanding. Come to think about it, why do we need the Fed to determine what the price of money should be? Wouldn’t market participants be better at that sort of thing? At least better than a group of individuals who aren’t actually making loans? Also known as the FOMC?
These are great questions. After all, it does seem a little silly when you think about. After all, the price of money isn’t immune to the law of supply and demand. It ultimately has a market clearing price. It isn’t any different from widgets and laborers in that regard. However, by arbitrarily setting the price of overnight money in the banking system, the Fed generates inefficiencies in the economy. These distort its true health and asset prices in the process. Arbitrary? If it isn’t, it sure as heck seems to be.
We can debate this until the cows come home, but I doubt seriously if I would change this long-held belief.
So, here we are on October 7, 2022. The stock market is in the ditch as I type this sentence at 11:07 a.m. CDT. The reason investors are losing money today? Well, people are concerned the Fed is going to go “too far” in correcting a problem it helped create, inflation.
In truth, I am sort of surprised “we” haven’t seen more upheaval over the events of the past several years. From ham-handed economic lockdowns to extreme fiscal and monetary policy profligacy to what now appears to be parsimony at the Fed. It is somewhat dizzying.
It makes one wonder what would have been IF the powers that be had simply gotten out of the way. Not that they ever would have, but still. More COVID-related deaths at the start of the pandemic? Probably, yeah, probably, but not definitely. Less economic disruption and stress? I would argue undoubtedly so. Fewer supply chain bottlenecks and plenty of toilet paper for all? That is almost a given. So, less inflation and less need to distort the price of money in the system? Yeah.
This is how we ended up here today, cursing good economic data. Yes, the markets are still positive for the week. However, it is still a little frustrating when you realize people are losing money today because of what the Fed might do next month in order to fix problems it had a major hand in causing. After all, Joe Sixpack didn’t flood the markets with liquidity. The Fed did.
So, going back to the first paragraph: When is a good Employment Situation report not good for the markets? That’s right, when its strength allows the Fed to continue being aggressive in raising the overnight rate. Unfortunately, that isn’t a joke.
That is a shame, because I could use a good laugh to help me get rid of this horrible cold. Also, it is National Smile Day, and we all need one of those.
Thank you for your continued support. As always, I hope this newsletter finds you and your family well. May your blessings outweigh your sorrows on this and every day. Also, please be sure to tune into our podcast, Trading Perspectives, which is available on every platform.
John Norris
Chief Economist & Grump
Please note, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as those of our investment committee Investment Committee, is subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the rest of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.