Bad news for the economy is good news for the stock market… unless the worst happens

Traders work on the floor of the New York Stock Exchange (NYSE) on November 2, 2023 in New York.

Spencer Platt | Getty Images

Friday’s market reaction to the jobs report comes down to a simple premise: Bad news is good news, as long as it’s not that bad.

Stocks rose sharply after the Labor Department said nonfarm payrolls rose by 150,000 in October, 20,000 fewer than expected, but the difference can largely be attributed to car strikes, which now appear to be over.

For the Federal Reserve, relatively modest job creation combined with wage growth almost in line with expectations adds up to a scenario in which the central bank doesn’t actually have to do anything. It can simply continue to pass the data without having to change interest rates as the impact of the previous 11 increases is assessed.

“The Fed has finally achieved what it was looking for, which is a significant slowdown in the labor market,” said Mike Loewengart, head of model portfolio construction at Morgan Stanley’s Global Investment Office.

“We’ve already seen one or two misinformation along these lines, but the fact that this report comes on the heels of other weaker-than-expected macroeconomic data this week may encourage investors who have been waiting for a less hawkish Fed decision,” he added. .

Markets reacted to the report in a number of ways. Federal funds futures traders have reduced the likelihood of a December rate increase to less than 10% and now, according to CME Group tracking, the first cut is expected as early as May.

However, this cut could be really bad news because it would likely signal the Fed’s concern that the economy is slowing so much that it needs support from monetary policy. Slow, controlled growth is what markets and the Fed expect in the current environment, and negative growth is not.

“Investors keen on the Fed cutting interest rates should be careful what they wish for,” Michael Arone, chief investment strategist at State Street Global Advisors, said in an interview earlier this week.

Despite market prices, it appears that cuts are not imminent if recent statements from Fed officials are any indication. Fed Chairman Jerome Powell said Wednesday that cuts were not part of the discussion among policymakers.

“I think it’s still a long way off,” Richmond Fed President Thomas Barkin said during a Friday interview on CNBC’s “Squawk on the Street.” “You can imagine scenarios where demand drops and something needs to be done. You can imagine a scenario where inflation starts to stabilize and you want to lower real interest rates. Both of these imaginary things still seem quite distant.”

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