Jobs data in the US indicated an addition of 150,000 jobs in October. At the same time, the unemployment rate crept up to just shy of 4%. Fewer jobs and higher unemployment kinda suck from a human standpoint, but this drove the US markets higher by 6% in just one week.
It’s not just the US markets that cheered, a weakening jobs market in the US resulted in positive market movement across the world. Why is everyone happy? Let us remind you of the supremacy of capitalism!
Since after the pandemic, the US economy has seen a very tight job market. New job postings by companies have been strong and unemployment has been super low. This combination has been fuelling wage inflation, in addition to other factors fuelling inflation.
For central banks, the math is pretty simple - raise rates, slow the economy down and inflation will fall under control. However, this equation had been faltering for the longest time as the jobs market remained hot despite the US seeing the highest and fastest rate hike cycle ever.
If the jobs data didn’t cool, investors feared the Fed would keep raising rates to curb inflation, tipping the economy into a recession. A slow down in the economy is a desired result, not a recession.
However, with the jobs market finally showing some weakness, the Fed might just prolong its rate-hike pause, waning recently rising concerns of more rate hikes.
How does it matter?
A potential rise in inflation and the underlying strength in the US economy had sent treasury yields at a 17-year high just a couple of weeks ago. A rise in US treasury yields sends all other investments down, especially emerging markets.
That’s also why the Indian markets had been bogged down over the last month. Moreover, high valuations in the Indian markets haven’t been the best at cushioning blows, as vulnerability remains high.
Additionally, the US increasing rates also increases the possibility of a continued regressive monetary policy across the rest of the world.
The weak jobs data, and the lower possibility of rate cuts eased treasury yields, and also lifted pressure off other asset classes, like Indian equities.
The markets sharply reacting (positively or negatively) to data points around inflation, jobs and growth, or even comments made by Fed officials hasn’t been new. An unclear direction tends to sway the markets for short periods.
While the October jobs data point is positive, it isn’t enough to confirm that the US economy has successfully pulled off the most desired combination of low inflation and healthy economy. And until then, rate hikes in the US will remain a legitimate concern, along with other concerns like the conflict in the Middle East, a potential rise in inflation, RBI’s OMO, outflow of capital, and an upcoming election.
While we remain positive on the markets over the medium-long term, we continue to remain cautious in the near term.