This jobs report was particularly important because it was the first one since the Federal Reserve announced its focus has shifted to the employment side of the mandate. Inflation and CPI reports were the most anticipated releases for the last few years, however, that time is over. Now we've moved onto hanging on the jobs report given the new focus of the Fed.
Overall, this jobs report generally showed continued strength in the labor market. The unemployment rate dropped to 4.2% and the feared weakness that would indicate recession wasn't there despite a soft reading.
The economy generated 142,000 jobs in August against expectations of 161,000
Job gains were strongest in health care, construction, and leisure and hospitality. Service providing jobs continued showing relative strength.
Overall, this showed continued strength in the labor market and little evidence of impending recession.
Yesterday, productivity was also revised upwards (from 2.3% to 2.5%) and unit labor costs were revised down from (0.8% to 0.4%).
One of the reasons we have changed our focus is because the actions of the FOMC in determining the size of rate cuts will now be much more dependent on whether or not there is pain in the labor market. Powell has said specifically that he finds pain in the labor market undesirable at this time. It was not so long ago that we were hoping for soft jobs reports. Even though this one was slightly soft, I'd say its clearly within the soft landing zone. The miss was by about 10%.
Overall, I'd say this report slightly favors a 25 bps cuts rather a 50 bps cut. It doesn't immediately answer the question, but I would essentially consider this report as coming in as expected. The backdrop of positive GDP and productivity revisions are also the exact backdrop you want to see for a stable to positive labor market.
It's not longer a question of whether the Fed achieved a soft landing, we are in the early stages of one. Probabilities still slightly favor a 50 bps, as you can see above.
Ultimately, I think the level of the first rate cut is much less consequential than the general direction of rates. But the other important thing is that the Fed is dedicated to one thing now, ensuring that the eventual labor market slowdown that will inevitably come. And if recession does come, or an exogenous risk shocks market, the Fed put is now back.
Ultimately, we are enjoying a post-pandemic economy where commercial entities are unusually strong and robust after surviving the biggest economic shock in modern history. Productivity increases are a side effect of this improving modern economy and they bode well for the health of the labor market. As Sonu Varghese from Carson Research pointed out, the current productivity take off could lead us to similar situation to the Web Boom in the 1990s, which was obviously very positive.
We have spoken about the inconsistency that has occurred in many economic surveys and how an acrimonious political season may exacerbate the tendency to provide inaccurate responses. Inflation is still a political issue, but it has largely receded as a practical economic one for the Fed and for stock markets.
Overall, this report validates Powell's approach to leave inflation in the rearview mirror as far as the dual mandate is concerned. The rate cutting cycle has effectively started. Importantly, the reason that this report was enjoying such wide fanfare was because the Bears thought it might provide evidence that we are approaching a recession. However, this report is decidedly not recessionary, it is very much in line with a continued soft landing.
The resolution of this report in favor of the bulls, by showing recession is not likely imminent has a lot of significance for the seasonality of markets in an election year. You can see that the average performance in an election year is very different depending on whether or not we are in a recession or not. When we are not in a recession, the implied odds of positive returns based on historical data is much better.
Our economy is undeniably strong in many ways at the aggregate level. That doesn't mean individuals and families don't feel an economic pinch after a historic bout with inflation, but if you look at wages, they have generally been outpacing inflation even for the lowest income quintiles. This is a major difference from past economic cycles in earlier in the 21st century where wage growth was largely stagnant at these levels. Ultimately, the broader economic gain make the economy and the labor market more resilient.
We got you into two trades that helped you weather the volatility this week, our trade of the week last week going long $TLT and our timely $VIX call options at $16 which experienced triple digit gains at some points, and settled in the high double digits giving you plenty of room to benefit from the volatility spike. I believe we will have a VIX normalization back into the teens after the jobs report resolved favorably which should set up our November $VIX shorts to regain what they lost over the last week.
