- The US reported an increase of only 266,00 jobs in April, on top of downward revisions.
- Concerns of overheating seem overblown, or at least that the economy is adapting.
- The Federal Reserve is set to keep low rates for longer, hurting the dollar but being a boon for stocks.
Are seasonal adjustments responsible for the poor number? That is one explanation used to explain the bitter disappointment in April's Nonfarm Payrolls – an increase of only 266,000 jobs instead of nearly one million expected. Moreover, this meager rise comes on top of a substantial downside revision for March, 770,000 instead of 916,000 originally reported.
Even if the pandemic skewed seasonal adjustments, the picture is still far gloomier than earlier estimated. If the economy was overheating, the shortage in some raw materials and skill mismatches – vacancies are high but those out of work are not a good fit – may explain the slow hiring. Another explanation would be that America is not accelerating as fast as expected.
What does it mean for markets?
Contrary to reports which send mixed messages, the moves are crystal clear. The Federal Reserve is vindicated in its assessment that the economy still has a long way to go. Its other mantra, that "inflation is transitory" is also validated as fewer people in work mean less expenditure and weaker prices pressures.
The chances of the Fed tapering down its bond-buying scheme have substantially dropped, and the timing for a rate hike has already been pushed back. Bond markets now foresee it as coming only in mid-2023. The is a considerable shift from predicting an increase in borrowing costs already next year – and closer to the Fed's 2024 projection.
For markets and especially for tech stocks, bad news for the economy means good news. Low rates and $120 billion in fresh Fed money mean more room for stocks to climb.
The theory of overheating seems relevant only for stocks – valuations may be high, but look more logical when safer bets provide meager returns.
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