Yesterday, the non-farm payroll number came out with a big surprise, exceeding what was expected by 278K. Many analysts believe that this indicates the US job market is strong and the Fed has more room to increase the interest rate further. However, we already read headlines about massive layoffs and slower economic growth already which contradicts the NFP report. in addition to these, the stock market and USD did not respond to the number properly, or should I say as it was expected. So, what does that number mean?
First of all, we have to remember that sometimes numbers get revised and markets might need more evidence to believe that the labor market is strong enough to let the Fed raise rates. Next, there is a possibility that the current increase in employment is due to the lack of stimulus cheques and higher cost of living, which might put the idea of expanding business to increase the profit in the mind of a few people that have wrong expectations of the economy and no access to a financial advisor. We all know that in moments of despair, people might act foolishly, and being under financial pressure is one of those moments. For example, if you own are in the business of selling ice cream, with the reduction of customers and increase in expenses, you might believe it is a good idea to open another branch in another part of a city to boost your income.
There best way to break down yesterday’s number is to say that because of high CPI and low Fed Funds Rate, we are still in an inflationary period and as long as Fed keeps the rate below CPI level, we will see an increase in jobs until we don’t. At that moment, when business owners reach a threshold where they cannot maintain their business running profitable, layoffs will accelerate and CPI will stick to a higher level. Keep in mind that a higher rate will make it much more expensive for businesses to borrow and will crush their profit margin.
Moreover, it is essential to look into the bond market and see if these levels will be attractive enough for investors to pile their cash into bonds or if the rally continues to higher levels.