Episode 41

Ms. Pivot to Mr. Market – Lose My Number

Articles From: Interactive Brokers
Website: Interactive Brokers


Chief Strategist

Andrew Wilkinson, IBKR’s director of trading education, sits down with Jose Torres, senior economist, and Steve Sosnick, chief strategist, to discuss last week’s employment statistics and the market’s reaction to them.

Note: Any performance figures mentioned in this podcast are as of the date of recording (October 10, 2022).

Summary – IBKR Podcasts Ep. 41

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Andrew Wilkinson 

Welcome to this IBKR podcast, everybody.  I’m Andrew Wilkinson, director of trading education, and I am joined today by Steve Sosnick. Welcome, Steve.  

Steve Sosnick  

Thank you.  

Andrew Wilkinson  

Also, down in our West Palm Beach Office, I’d like to welcome Jose Torres, the senior economist here at Interactive Brokers. Welcome Jose.  

Jose Torres

I’m doing well. Great to be here. Thank you.  

Andrew Wilkinson 

We’re going to talk today about last week’s labor data, the monthly payroll data. Steve is going to fill us in on the markets’ response to that, but I’m going to turn back to last week’s unemployment and payroll data. Jose, you said in your market report immediately afterwards that the labor market was on fire. Tell us, what gives it that spark?  

Jose Torres 

While the demand for workers remains very high, the unemployment rate is very low from a historical perspective at 3.5%, meaning that those that want to find work can find it pretty easily. The rate of job growth has also been impressive despite slowing consumer demand and tightening financial conditions. While there has been anecdotal evidence of hiring freezes and rising layoffs, we have also seen companies hoard labor due to difficulties hiring during the pandemic, the current labor shortage, and compensation expenses that are rising slower than overall prices. It’s safe to assume at this point that laid off workers are finding jobs elsewhere pretty quickly.  

Andrew Wilkinson 

And Jose, we should also talk about the other labor market data that came out. We had a strong outright payroll number but talk to me a little bit about the JOLTs report last week. Did that report provide a false dawn for recession hunters?  

Jose Torres  

Maybe not. We haven’t been in an inflationary era in a long time, and it makes it challenging for those who weren’t around to analyze these dynamics. During the 1974 recession, we witnessed an economy that was in recession but was still adding jobs. In the present, we’re adding jobs, but productivity contracted to its lowest level in decades as of the second quarter. More jobs, more demand for workers, but declining productivity and compressing margins can still lead to declining output. So, this kind of potential recession, it’s going to be a lot different than what we’ve seen in 2008, in 2000, in the 90s, where it’s not going to be characterized by significant unemployment. It will be characterized more by affordability issues and those sorts of things.  

Andrew Wilkinson  

Very simply Steve, the markets did not like the payroll data. What happened?  

Steve Sosnick  

The way I looked at it at the time was if you’re expecting a certain number and you react extraordinarily negatively or positively to that number, then probably your expectations were wrong and needed to be recalibrated.  That’s really what we saw. Yes, there was a benefit in the unemployment number, but I suppose they could better explain that they count the payrolls a bit differently from unemployment. Instead of people showing up for work, it’s people showing up for unemployment benefits. And it’s divided by the labor force, which we saw the labor force participation rate fall.  That was a benefit and that leads into Jose’s sentiment about the labor market being quite strong.  

But the payroll number, which is really sort of the headline of what everybody focused on, the difference was minuscule, especially when you adjust it for the size of the US economy. So realistically the market reaction tells us that the market was not really where it should have been in terms of the payroll numbers. It comes back to the focus on the pivot. If the pivot were someone’s boyfriend or girlfriend, the pivot would be saying, “please lose my number, stop calling me.”  

Andrew Wilkinson  

I would say a week in the market is a long time. We’ve now got two critical reports coming out this week. So, following the September jobs report, we’ve got consumer prices and retail sales coming up. Which one is likely to prove the most dangerous for investors, do you think?  

Jose Torres 

The CPI without a doubt. Inflation is top of mind for market participants. Core inflation, which includes the sticky areas that are most concerning for inflation expectations in the long term, is expected to decelerate slightly from 0.6% to 0.5.   And that would be welcome news for the Fed, because that would mean that core inflation is moving in the right direction.  

If it’s unchanged or if it accelerates, that can mean big trouble for equities and for bond yields, particularly in the bond market. We’re seeing a lot of problems internationally. the US Treasury market is starting to have some liquidity issues that that Steve can certainly talk more about.  As prices rise and as inflation rises, that changes the landscape for all kinds of investors.  And we haven’t seen an inflationary recession in a long time.  

Investors haven’t been conditioned to navigate these kinds of waters where you don’t have these liquidity injections that you can expect from central banks all the time. So it proves to be a challenging landscape because we’re conditioning.  

Andrew Wilkinson  

Steve, which market, which asset class at this point is of most danger potentially to investors?  

Steve Sosnick 

To some extent to all of them. There are definitely problems across the board and I do think that it’s because of what Jose just referred to.  Investors have gotten very used to the world’s central banks coming in like the cavalry riding to the rescue.  

And they’re not.  

Yes, the Bank of England did so.  But this was really before the end of the quarter where you had very specific factors and that was more just to stanch the bleeding rather than to launch a turn around.  

We’ve not faced this kind of inflation since most of us have been in the markets. You know, I ran some charts today on a different topic going back to 1987 and it occurred to me that we haven’t seen, in the entire 35 years that that chart covered, there hasn’t been this kind of inflation. So we have to adjust.  

All of this is the classic, Warren Buffett statement of, “When the tide goes out, you don’t know who’s swimming naked.”  We found out that UK pension funds definitely were wearing very skimpy bikinis.  

Now we see there’ll be plenty of other trouble signs that might crop up.  

Andrew Wilkinson  

Very good.  

Jose Torres, senior economist for Interactive Brokers down in West Palm Beach. Thank you for joining us.  And Steve Sosnick, chief strategist here in Greenwich, CT.  Thank you so much.   And folks, don’t forget to check out ibkrpodcasts.com.  

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