The US job report for August released on Friday was one of the weakest since June last year. The total nonfarm payroll employment increased 235,000 in August, a massive 485,000 jobs below what the market was expecting. Despite the disappointing print, markets continued their upward trend as if nothing has happened. The MSCI’s all-country world index notched a new record driven by big tech stocks such as Apple Inc, Amazon.com Inc and Google. Yields on the benchmark 10-year Treasury note rose marginally potentially being spooked by the jump in hourly earnings, a potential sign of future inflation.
Why investors seem unfazed by the weak jobs print? Given that jobs data is one area where the US Fed would like to see more improvement before it can decide to slow its asset purchases, investors may have interpreted the weak report as a positive signal when it comes to the quantum and timing of the tapering. Also, while the job numbers underwhelmed expectations, overall unemployment continued to decline, and companies’ earnings remain solid showing that the US economy is recovering.
The August job report is important because it comes at a time when we are trying to make sense of the recent divergence between the inflation surprise index (pointing upwards) and the economic surprise index (pointing downwards) in the US. Such divergence usually occurs when an economy is transitioning from reflation to stagflation. Stagflation occurs when GDP growth is slowing and inflation is rising. Of course, it is too early to make a call, but it is an important dynamic to watch. A few more weak jobs reports would reinforce the stagflation narrative which will require a completely different investment strategy.
Source: US Bureau of Labour Statistics