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Market Reaction On Payroll Data & Overall Inflation

U.S stocks closed lower on Friday, 2nd September 2022, marking the third week of losses. 

Nonfarm payrolls increased 315,000 (est 300,000) last month following a revised 526,000 advance in July, a Labor Department report showed on Friday.  

The unemployment rate unexpectedly rose to a six-month high of 3.7% (est 3.5%), the first increase since January, as the participation rate climbed. 

U.S. Labor Secretary Marty Walsh said he’s confident that the demand for workers is strong enough to withstand the Federal Reserve’s attempts to cool the economy. 

The initial market reaction after the payroll data was to rally but pared its gains until U.S factory orders came in at -1% (est +1.8%) which sent the market much higher, trading above 4000 in the S&P. Unfortunately, it could not hold on to gains and took a nasty turn downwards. 

Here are the closing levels on Friday, 2nd September 2022: 

 Last  Change %Change 
Dow Jones 31,318.44 -337.98. -1.07% 
S&P 500 3,924.26. -42.59. -1.07% 
Nasdaq Comp 11,630.86. -154.27 -1.31% 
U.S. 10Y 3.19%   
VIX 25.47 -0.09 -0.35% 

It felt like the bulls were reading the payroll data to mean a less aggressive Fed or that the economy is strong enough to withstand the Fed.  

The data show that more people are being hired. The unemployment rate being higher at 3.7% was due to more people joining the workforce. While this may lead to less pressure on wages, it may not translate into lower overall inflation. 

As the sellers backed off after the data, the bulls were led into a sucker rally. When it could not go any higher, the bears came out to play and punished the bulls. 

The lesson here is probably “don’t fight the Fed”.  

If it was wise not to fight the Fed when they were adding liquidity into the markets which gave us years of higher stock prices, why should we not do the opposite when they drain liquidity? 

I guess it may be hard for bulls to throw in the towel and accept that a hawkish Fed could lead to lower stock prices. 

The message from Jackson hole was pretty clear. The Fed is going to do what it takes to bring inflation down even if it means bringing on a recession. 

Unless inflation numbers come down… “don’t fight the Fed”! 

Source: CBOE, Bloomberg

This commentary is written by James Gomes 
James has been in the finance industry for over 30 years and most recently worked for a large U.S. bank for more than 20 years. 

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