Markets worldwide wait with bated breath for the Bureau of Labor Statistics’ (BLS) July jobs report aka the Employment Situation Summary. Released on the first Friday of every month, the jobs report is one of the most influential data dumps for investors as it indicates the overall health of the US economy via the unemployment rate and number of new jobs generated. However, this month the jobs report is particularly important and will have a wide-ranging impact on the market depending on its outlook.
An “accommodative stance on monetary policy”
The Federal Reserve, which has been supporting the economy throughout the pandemic with “easy-money policies”, is now looking to relax its $120 billion a month bond-buying program. Hoping to see several, strong jobs reports before reducing its current monetary policy; the Fed is looking to loosely maintain inflation’s average around 2 percent and achieve maximum employment as determined by the committee. Until labor market conditions meet these goals, the Fed plans to continue its “accommodative stance on monetary policy” which includes an interest rate of 0.00-0.25.
While the Fed intends a gradual cool off of these policies, if it feels rushed the market could react poorly. One example is the US housing market where home prices have been rising at a double-digit pace thanks to low interest rates, increased demand, and decreased supply due to pandemic related policies. If the Fed isn’t careful, the housing boom could become another housing bubble. But with the 2008 crisis at the forefront of policymakers’ minds, the winddown is unlikely to dramatically affect the housing market.
The Jobs Report
If one thing is certain, it is market uncertainty. As a trailing indicator, the jobs report can only tell us about last month – which was largely unaffected by increasing outbreaks of the Delta Variant. Indeed, the variant has generated a lot of FUD and could potentially cause the Fed to hold off on its rollback. Still, the Fed’s decision will be tied directly to the jobs reports’ numbers, meaning strong numbers could inspire a tightening of economic policy whereas weak numbers could keep the energizing bond-buying program around longer. In the latter case, the market might rally considering investor anxiety induced by lingering covid concerns. But if job growth is above the high end prediction of 1 million, then the market could start selling in anticipation of the Fed’s potential policy change – similar to the Great Recession’s 2013 “taper tantrum”.
Whatever the jobs report brings, the Federal Reserve has a myriad of factors to contend with before cooling off its easy-money policies. Businesses are struggling to find employees with April setting an all-time record of 8.3 million job openings. In some cases, minimum wage is no longer enough to entice employees into service industries, causing many businesses to miss out on surging demand. Additional supply-chain concerns have impacted a broad range of industries particularly those relying on complex supply chains. Manufacturing, construction, retail, and wholesale trade have been notably impacted by this issue. Shortages of key building materials have delayed new construction, contributing to record low housing inventories. Ultimately, these supply bottlenecks also have an effect on inflation.
A cutback on the Fed’s monthly bond-buying is inevitable and when it occurs the market will correct accordingly. The question is when and how many strong jobs reports must be issued before that point.
While it will likely take several months to get a picture of the labor market’s equilibrium, July’s jobs report could indicate whether the stock market will become more volatile overall. In turn, corporate confidence will be affected based on whether the economy is growing or slowing. A large number of new jobs indicates economic growth but a decrease in numbers from June and May suggests market slowing – which could be a good thing depending on the Federal Reserve. Furthermore, unemployment trending down usually means interest rates will rise and the market will begin to factor that in accordingly.
A more pressing concern for many companies and consumers may be inflation. Inflation was mentioned on many companies’ earning calls and if it becomes a bigger issue for producers and consumers that will affect retail behavior. Industries that have experienced a lot of growth following the market contraction, particularly those that will be exposed to price pressures like energy and industry may have a better outlook.
Is Waiting the Best Policy?
In conclusion, with this much uncertainty its best to hold off on investing until we see how the market reacts to July’s jobs report. On one hand, weak numbers could indicate a slow down but will also make it more likely the Fed continues its economic support. Whereas, strong jobs growth may show an improving economy that no longer requires the full $120 billion federal bond-buying program. I am predicting a mid-range job growth of 600,000 for the month of July because labor was not as affected by Delta Variant concerns. But we will know the real numbers very shortly.