Why markets didn’t like the strong US jobs data

The US economy added a whopping number of jobs last month.

But markets didn’t like it much.

That might surprise you if you mistakenly believe that financial markets should reflect economic strength.

So let’s look at why markets don’t necessarily believe that improving job prospects are a good thing…

Who needs jobs when you have money-printing?

The US economy added nearly 300,000 jobs during December. That’s a lot more than even the most optimistic had expected. And gains seen in previous months were revised higher by 50,000.

As Capital Economics notes, this figure might have been flattered by unseasonably warm weather: “Construction employment increased by a massive 45,000 last month and more than 120,000 in the fourth quarter”. But even taking that into account, “the numbers look good”.

The unemployment rate remained stuck at 5%. But that’s because the participation rate (the proportion of the population actively in work or looking for a job) increased too. Wage growth remained “disappointingly” weak, but at 2.5% it was hardly awful.

At the end of the day, you can sit around and pick holes in the jobs data. It’s rarely a good idea to take any kind of statistic – government or otherwise – at face value. You can quibble with the quality of the jobs, or talk about special factors such as the weather.

But there’s no question that, for now, the trend is higher. That might change, but the important thing is not so much the veracity or otherwise of the figures, but the market’s reaction to them.

So from that point of view, a “normal” person – one untouched by the wonders of Wall Street – might think this is good news. After all, isn’t this the reason that we bailed out all the banks at such expense? (I’m not talking financial expense here, by the way – I’m talking the longer-run costs of undermining faith in the capitalist system and making central banks the focal point of our financial system.) To save the economy? To keep people in jobs?

Well, it might be good news for people in the “real” world, but it hasn’t made global markets feel any better. As David Rosenberg of Gluskin Sheff points out: “Santa may have bypassed all the chimneys on Wall Street this year, but that has not been the case on Main Street”.

So what’s the problem here? Why did US markets fall on Friday, despite the strong data? Why are Asian markets still falling this morning?

The US jobs data makes an interest-rate cut less likely for now

It’s pretty straightforward. There’s one thing bothering markets right now, and that’s the direction of US monetary policy. The big problem for markets, as I’ve been saying, is the strength of the US dollar. A strong US dollar is having a deflationary effect on the world, through commodity prices and China’s devaluation efforts.

More importantly, this is all happening when both equities (in the US at least) and bonds (just about everywhere) look expensive. Monetary conditions are tightening at a time when companies and governments have grown used to stubbornly – reliably – low interest rates and ease of borrowing.

Companies have grown comfortable with this backdrop. Just as even far-sighted oil companies based their “worst-case” scenarios on oil being at least $70 a barrel, you can bet that companies borrowing cheap money to restructure their balance sheets, or to do big ego-boosting merger deals, are only pricing in a very small future increase in financing costs.

Yet it may not last long. Bond investor Bill Gross – formerly of Pimco, now of Janus – is worried that “bonds will have a tough period ahead” if the Fed takes the latest jobs data at face value.

So that’s all scary stuff. Tighter monetary policy is bad news for both stocks and bonds. Who knows how many casualties there’ll be when the demands for repayment come in?

And the tricky thing is that the strength of the new jobs report means that there’s little reason for the US Federal Reserve to stop raising rates, or to deviate from its plan.

I still suspect that Fed boss Janet Yellen would like to rein in the tightening. But as of Friday, she doesn’t yet have a good reason.