Key insights
- The author questions the market's negative reaction to the latest jobs report, which showed strong headline NFP numbers but a decline in full-time employment and a rise in part-time jobs. Despite the nuanced data suggesting a less robust labor market, market participants increased Fed rate hike expectations significantly. This disconnect between data interpretation and market pricing suggests potential overreaction or mispricing of future monetary policy, creating a bearish signal for equities due to anticipated tighter financial conditions.
So the leading theory for why the stock market fell so much last Friday was because a hot jobs report led to a substantial increase in Fed rate hike odds. NFP reported 172K job additions vs 80K expected.
However, it barely takes any digging to see that all of the job gains came from part time jobs: Part time jobs were up 230K while full time jobs were actually down 80K. Any random person can tell it's not a healthy job market, never mind sophisticated traders with all the information in the world available to them.
Yet, the market treated the NFP results as though they were a massive beat. Federal reserve rate hike odds for the year increased from 40% to 70% once NFP released. I don't understand the reaction. I know there are other concerns such as high oil/inflation, but a strong jobs market really doesn't seem like one of them.
How did sophisticated stock and bond traders come to the conclusion that the jobs market is flourishing and that as a result, rate hikes are imminent?