Stock market may be misreading what weak jobs report means for the Fed
The much weaker than expected April jobs report reinforces the Federal Reserve’s easy policy stance, but some strategists still expect the central bank to signal in the next couple of months that it will slow down its bond buying.
Economists had expected to see 1 million new jobs last month, so the government’s report of just 266,000 was a gut punch to the view that the economy is rebounding in a smooth upward trajectory. The anticipation for a big jobs number also had put the spotlight on the Fed’s easing programs.
Stock futures rose and Treasury yields immediately fell after the report. But the 10-year Treasury yield, after falling to about 1.49% turned around to trade at 1.55%. The 5-year also fell but stayed near its low. Yields move opposite bond prices. In afternoon trading, stocks remained higher with the Dow up about 160 points.
“I’m wondering if bonds are selling off a little as it just reinforces [Fed Chair Jerome] Powell wanting to be patient,” said John Briggs, head of global strategy at NatWest Markets. “But if you’re like me, waiting for the Fed to taper, I think the Fed is going to start talking about it in September. That means the market is going to be talking about it in the summer.”
Economists said the May jobs report will provide more information on the state of hiring, which could have been slowed by bottlenecks showing up in supply chains. For instance, auto workers have been idled due to the shortage of semiconductors needed to build automobiles. There is also an acute shortage of workers in some areas and industries. Economists also see closed schools as an issue, keeping parents from the workforce. To some extent, expanded unemployment benefits may also be a factor.
“If one is thinking about the evident labor shortages being inflationary, that should push the 5-year yield up,” said Michael Schumacher, Wells Fargo rates director. “But the other side is if you consider the chance of the Fed tapering, that’s been pushed back slightly. Not much in my opinion, but people might take that view.”
Schumacher said he still expects the Fed to discuss trimming its purchases of about $120 billion a month in Treasurys and mortgage securities.
Fed Chairman Jerome Powell has knocked the idea that the Fed will begin discussing an unwind any time soon. But some strategists still expect the Fed to be forced into slowing the purchases and ultimately ending them due to the strength of the economic recovery and the specter of inflation.
A step toward ending the bond-buying program would ultimately be a step toward raising interest rates, which the Fed is not expected to do any time soon. Powell has said the Fed would complete the slow wind down of its bond purchases before raising interest rates.
“If you’re an economy bull, you say this is probably an aberration. … The bears can say you’re losing momentum. Either are possible until you get another month,” Briggs said, noting the next report could show a large amount of hiring. “When was the last time you reopened an economy in a pandemic? Where are your seasonal factors for that?”
He said the bond market is also reacting to the potential for more fiscal stimulus, highlighted by the White House after the weak number.
“It’s as simple as this — a drop in rates, let’s buy tech,” said Peter Boockvar, chief investment strategist at Bleakley Advisory Group. “The stock market can’t decide whether it wants to celebrate the drop in yields and maybe a Fed that’s not going to taper so quickly but at the same time, we’re early stage in the recovery but we’re seeing a lot of late stage behavior like supply demand getting hot … this overheating.”
Jan Hatzius, chief economist at Goldman Sachs, said the bond market reversal appears to have come as traders looked at the inconsistencies and decided the number was distorted. “That was my view as well,” he said on CNBC. Hatzius said the weak jobs report does not change his view that the Fed will taper its bond purchases starting next year and then raise interest rates in 2024.
“I’m not sure having one dud report changes the calculation too much,” said Schumacher. “I suspect the forecast range will be astronomical next month.”
The unemployment rate rose in April to 6.1% from 6%. The bulk of hiring was in the leisure and hospitality sector, which added 331,000 jobs as pandemic restrictions on restaurants eased.
Average hourly wages rose by 21 cents to $30.17 in April, and economists note that strong hiring of workers in the hospitality industry typically makes overall wage numbers go down.
“This is a devastating disappointment, more than just seasonal problems. We had declines in everything from professional services to manufacturing and even couriers and transportation,” said Diane Swonk, chief economist at Grant Thornton. “Turning on the lights in the economy is harder than turning them off.”
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