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  • The U.S. economy created more jobs than expected last month.
  • However, the pace of job creation is shrinking.
  • The unemployment rate increased slightly to 3.7% in October.

The latest Bureau of Labor Statistics report on job trends was released on Friday. The October jobs data was highly anticipated because employment is the second mandate shaping the Federal Reserve’s monetary policy. The Central Bank is laser-focused on raising interest rates to crimp inflation. If unemployment substantially increases, it could force the Fed to abandon its hawkish stance.

Unfortunately, the report was a mixed bag. The BLS’ Establishment Survey showed 261,000 jobs were created in October, a stronger-than-expected performance, despite fewer jobs being created than in previous months. The Household Survey revealed the U.S. unemployment rate ticked higher to 3.7% from 3.5%. Wages, a key inflation ingredient, increased by 4.7%, which is still “hot” but less so than earlier this year.

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What the jobs report says about a Fed pivot

In “What the 'Confusing' October Jobs Report Means for the Fed and Markets,” Real Money Pro’s Peter Tchir weighed in on the data’s potential impact on future Fed interest rate decisions. He writes:

“Since it is difficult to describe things as good or bad in this topsy-turvy world, let's look at Friday's jobs report from the following four perspectives:

Makes the Fed more likely to hike:

Total Establishment Jobs and Revisions were very strong.

Makes Fed less likely to hike:

Nothing obvious.

Should be baked in:

Average hourly earnings (monthly 0.4% a tad higher, but annual 4.7% down from 5%).

Average work week remaining same at 34.5.

Confusing as heck:

Unemployment rate. The unemployment rate ticked up to 3.7% from 3.5% -- a step in the right direction, in theory. But that came with the labor force participation rate dropping to 62.2% from 62.3% (one thing almost everyone can agree on is that we'd like to see this tick higher, not lower). So the increase was due to the Household survey saying we LOST 328,000 jobs. Even for "government work," almost 600k in two things that, in theory, roughly measure the same things seems like a lot, but that has been the case for months now.

Jobs continue to be the highlight of all economic and corporate data we receive (unless you look at the Household data)...That is not surprising given the difficulty companies had filling jobs. Indeed, jobs, in all likelihood, given the experiences of the past two years, will be the LAST shoe to drop in any economic weakness….

This report will provide probably a touch more impetus to see a more hawkish Fed than not, but with so much changing between 2:30 p.m. on Wednesday and now, it probably isn't enough to move the needle significantly. [emphasis mine] ”

The unemployment rate is based on the household survey, while headline job creation is reported in the establishment survey. These two competing surveys should tell us similar things, but they’ve been at odds with each other more than in sync with one another all year. 

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The fact unemployment ticked up could be viewed as an emerging green shoot, but that may be too optimistic a view, given the establishment survey numbers. It’s hard to imagine that the Fed will view this report as anything other than “noisy,” suggesting its attention will shift toward other data points, like next week’s Consumer Price index (CPI) report.

Unfortunately, October’s CPI isn’t likely to move the needle either. In Morning Recon, Real Money’s Stephen Guilfoyle writes, “The Cleveland Fed's Nowcasting model shows October CPI at 8.09% for the month of October, with core CPI at 6.58%. Numbers like that would not offer much relief from the September CPI prints of 8.2% and 6.6%, respectively.”

If the Nowcasting forecast is correct, it may remain business as usual at the Fed for a while longer. That isn’t very encouraging, given the S&P 500 retreated following this week’s decision by the Fed to raise interest rates by another 0.75% to a range of 3.75% to 4%.

The Smart Play

As Tchir said, unemployment is a lagging indicator. Companies don’t issue pink slips until they’re convinced sales and profit will continue falling. That usually doesn’t happen until the bear market is well underway. Remember, historically, individual stocks bottom before the stock market, and the stock market bottoms before the economy.

That said, that sequence of events can be sloppy, which is why the old Wall Street adage, “bear markets wear you out,” exists. As stocks try to sniff out improving conditions, they’re prone to highly volatile pops and drops that can take a toll on investors.

The risk of higher rates remains, but perhaps, we’re seeing early evidence that the job market is slowing. The economy created an average of 289,000 jobs growth over the past three months. That’s lower than the average of 347,000 and 431,000 over the past six months and 12 months, respectively. If this trend lower continues, employment will become less inflationary, supporting the Fed moving to the sidelines. If so, attention can shift from inflationary to recessionary risk, which is the real precursor to a Fed pivot from hawkish to dovish policy.

At this point, however, this is mostly guesswork. We’ve yet to see convincing evidence inflation is slowing down. So investors should continue playing defensively, such as limiting position size, avoiding margin and highly volatile stocks, and using stop losses to protect capital.

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