Beware of Non Farm Payrolls and Interest Rates

Non Farm payrolls are going to be hitting this Friday.  The past few months the numbers have been robust.  While that is generally considered a good thing, with regard to inflation, a robust number would be a market signal that the economy is too strong and that the Federal Reserve is going to have to continue raising interest rates.  The market has already sold off significantly since Friday’s news conference with Federal Reserve Chairman Powell that the Fed is intent on combating inflation.  This Friday’s number could be a signal for the markets that there will be far more pain in store for the markets.

Considering this, I wanted to put together a few notes for individuals to watch for.  Expectations management is going to be a solid game-plan going in to Friday’s numbers.

Non Farm Payrolls Data Points

Non Farm Payrolls Total July 22
Total Non Farm Payrolls 1990 – July 2022

Here are total non-farm payrolls since 1990.  Every month, the Bureau of Labor Statistics reports on how many jobs are within the economy.  The latest release for July, 2022 was 152,536,000 with an increase of 528K.  [1]Bureau of Labor Statistics https://www.bls.gov/news.release/empsit.nr0.htm

This chart above shows the totals of all jobs, or payroll jobs within the economy.  And, as you can see, the numbers are still heading higher; the economy is increasing jobs every month.  On the surface, that all sounds great.  But, with the inflation outlook, this will mean the Federal Reserve needs to raise interest rates even further.

The next chart shows the change in payrolls.  The last month was an upward increase of 528K new jobs added to the economy:

Non Farm Payrolls July 22

It is that 528K that got the markets all excited last month. And, looking at these data points, the numbers continually add more and more jobs to the economy.

If you look a little deeper, whenever there is any kind of slowdown, there is generally a peaking in the jobs data.  Then, the decline starts.  Often, the decline is sharp and steep.  Regardless, putting these charts together shows that the economy is far from peaking in jobs; let alone declining to get to a more moderate level.

Non Farm Payrolls breakdown

The initial knee-jerk reaction to the latest non-farm payrolls was accurate.  The jobs market is far too robust.  Payrolls are a lagging indicator.  It takes time for businesses to react to economic trends.  Businesses will want to be certain before the go into a hiring/firing phase.  Because of this, despite there being signs of the latest inflation increases working their way in to the economy, businesses are still a long way away from making a seismic shift in employment numbers.

Market Reaction: What to Expect

Here, you can see the market sold off on the latest news from Non-Farm Payrolls:

SP500 NonFarm Payrolls Aug22
Initially, off of robust non-farm payrolls numbers, the stock market sold off.

Non-farm payrolls were far too robust.  And, initially, players moving in and sold off the market.  But, later the stock market rebounded and pushed upward.

I am looking for a number that is still positive.  That may be thought of as being bad for the overall economic picture as the Fed will be forced to continue further with raising interest rates.  The stock market will sell off equally if there is a very robust number on the increase for payrolls data.  If the increase is soft, the market movement will likely be soft.  If the number is big, so will be the sell off.

But, if the number is negative, this may give the market what it is looking for as validation that this could be a buying opportunity.

Understanding that there is a big market moving opportunity will allow someone to really capitalized with whatever strategy is necessary.

References

References
1 Bureau of Labor Statistics https://www.bls.gov/news.release/empsit.nr0.htm

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