When Good News is Bad

October 07, 2022 | Matt Barasch


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For this week’s COW, we will focus on jobs and the main thrust of today’s piece – good news is bad news right now.

Chart of the Week (COW)

For this week’s COW, we will focus on jobs and the main thrust of today’s piece – good news is bad news right now. Let’s look at the chart and then comment:

We are looking at a chart of the last 8 U.S. recessions (ex-2020) and the maximum jobs lost over a 12-month basis leading into or during the recession. On average, job losses peaked at ~2 million on a 12-month basis; although, there is obviously a pretty wide dispersion around that average. In any event, as you can see, 2022 has not seen any collapse in jobs with the “lowest” 12-month reading thus far at +5.69 million. To put that +5.69 million number in perspective, it would have been the highest 12-month job creation number in the 80-years from 1940 to 2020.

Good News is Bad News

With the jobs numbers in mind, we have reached the point in which good economic news is actually bad news from a market perspective. To wit, the U.S. reported non-farm payrolls this morning and while the monthly reading was a rather impressive 263,000, markets (both stocks and bonds) reacted negatively to the news.

Why? Now, usually when we get a good economic number, a negative reaction will occur because expectations were even better than what we got. In other words, the number was 263k, but the market thought it would be 300k+ or something like that. In this case though, expectations were around 200k, so we can’t blame over-exuberance for the reaction. Further, sometimes we can look at “the bones” of the report and say – well, the headline was good, but if you lift the hood, there were some things really not to like. But again, in this case, if you look beneath the hood, the overall jobs report is solid with gains in private payrolls (a small loss in government jobs) and manufacturing and a decline in the unemployment rate.

In this case and really the overall environment we are in – any news that paints a positive economic picture (as this jobs data surely does), adds more fuel to the argument that interest rates need to go higher in order to cool the economy and bring down inflation. This mainly stems from the fact that some drivers of inflation – supply chains, food prices, to some extent oil prices – are beyond the nightstick of Fed policy. In other words, no matter how much the Fed or the Bank of Canada or other central banks raise rates, the rate hikes are unlikely to have much impact on these things. Thus, the Fed (and other central banks) are forced to use their rate hike nightstick on what they can impact – which is mainly demand. When demand comes down, inflation will come down.

When jobs continue to rise like they have, it is clear that demand will not fall as quickly as hoped as the single biggest driver of demand is having a job. Thus, a better than expected reading continues that narrative that rate hikes have some room left to go with the Fed Funds rate likely to rise another 1.5% to 1.75% over the next 6-months from the current 3-3.25% level.

Bottom Line: We have reached the somewhat perverse stage of the cycle in which bad data would likely be cause for some celebration amongst market participants. This would help to feed the narrative that the economy is slowing and that the demand side of inflation is likely to follow suit. Some leading indicators of job creation – job openings, mass layoffs – are starting to show some indications that the jobs market is losing momentum; however, any meaningful slowdown likely remains some ways off. Thus, we remain cautious on the outlook over the next few months; although, as we have mentioned previously, in markets such as this, good businesses are thrown out with bad businesses and thus we expect opportunities over the next few months that are likely to be very attractive in the context of the next 3-5 years.