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Investors Pivot On The Idea Of A Pivot

Investors Pivot On The Idea Of A Pivot

Posted October 7, 2022 at 12:38 pm
Steve Sosnick
Interactive Brokers

If markets have a big reaction to a number that is basically what was expected, then it’s clear that markets were actually expecting something else. 

Yet again, despite a steady stream of Fed governors asserting otherwise, investors were hoping for a report that could somehow signal a “Fed pivot” – a sign that the Federal Reserve will pause and reverse its rate hikes imminently.

The eagerly anticipated nonfarm payrolls report was generally in-line.  The 263,000 increase – with no revisions – was quite close to the consensus estimate of 255,000.  To put it in perspective, that is a difference of 8,000 in a labor force of over 100 million.  If that wasn’t priced in, what was? 

To be fair, the unemployment rate ticked down to 3.5%, 0.2% less than the consensus.  That matched the cycle low set in July, which matched the all-time low that was set in September 2019.   Remember that the unemployment rate has two components.  According to the BLS website, the unemployment rate is calculated as:

(Unemployed ÷ Labor Force) x 100

A statistic closely related to that denominator, the labor force participation rate dipped by 0.1% to 62.3%.  To achieve the lower unemployment rate, the number of people defined as unemployed had to fall faster than the size of the labor force.[i]  But keep in mind that the 0.1% differential and the number of unemployed are both very small relative to the size of the US labor force.

No matter how we slice it though, the employment picture remains solid.  And that creates a problem for those who bought assets on renewed hopes of a Fed pivot.  The Fed’s dual mandate is to achieve stable prices and full employment.  The full employment part is achieved – if not exceeded – so there is little reason for them to lose focus on the much trickier stable price goal.

Today’s market reaction clarified my view that employment is a one-tailed risk for markets.  By that I mean that even a modest decline in labor statistics will do little to change their thinking about the path of interest rates.  Anything short of a catastrophic report will keep the Fed’s restrictive policies in place, and it’s hard to think that anyone is rooting for a catastrophe.  Labor reports will need to take a backseat to price data.  We get PPI and CPI next week, on the 12th and 13th, respectively, with the Fed’s preferred measure, the core PCE deflator coming on the 27th.  If you’re still among those hoping for a Fed pivot, at least wait to see if inflation data hints in that direction.

On Tuesday, we wrote:

“The payrolls report on Friday and the start of earnings season a week after that will offer some important clarity about whether this two-day rally – powerful as it is – is anything more substantial than a major bounce off deeply oversold conditions.”

We are still a week away from the start of earnings season, but as of now the oversold bounce idea seems credible.  Milder inflation data and/or solid earnings can bolster stock prices.  Hopes for a Fed pivot – something that has been disavowed by Chair Powell and most of his colleagues – are unlikely to help for a while.

[i] I highly recommended perusing the full page of BLS explainers: Concepts and Definitions (CPS) (bls.gov)

Disclosure: Interactive Brokers

The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Interactive Brokers, its affiliates, or its employees.

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