Stock Markets Sank After the US Jobs Report. Can CPI Data Save Them?

Key Concepts

• US Jobs Data: October & November payrolls, unemployment rate, revisions to previous months’ data.
• Federal Reserve (Fed) Policy Expectations: Market anticipation of rate cuts, Fed Chair Powell’s commentary on payroll adjustments.
• CPI Data (Consumer Price Index): Upcoming November report, expectations for inflation rates, services vs. goods inflation.
• Risk-Off Sentiment: Market reaction to disappointing data, sell-offs in stocks, safe-haven asset movements (gold, yen).
• Government Shutdown Impact: Disruption to data collection, particularly the unemployment rate for October.
• PMI (Purchasing Managers' Index): Data from ISM and S&P Global indicating economic activity and inflationary pressures.
• Bank of Japan (BoJ) Policy: Anticipated announcement and potential market impact.
• ECB & BoE Policy: Expected actions and current economic conditions in the Eurozone and UK.

Market Response to US Jobs Data & Economic Outlook

The markets reacted negatively to the recently released US jobs data for October and November, mirroring a similar risk-off sentiment observed after the previous Fed meeting. The initial reaction was swift, with significant losses for both the S&P and NASDAQ. This mirrored a two-phase narrative: speculation on Fed policy followed by a risk-off conclusion when expectations weren’t met.

The October payrolls data showed a gain of 64,000 jobs, while November saw a loss of 105,000. Revisions to previous months were also downward: September was revised down to 108,000 from 119,000, and August was downgraded from a 4,000 loss to a 26,000 loss. The unemployment rate rose to 4.6%, the highest in four years.

Despite this weakness, market expectations for a Fed rate cut in January remained largely unchanged, with over 70% probability of no move. Expectations for rate cuts in the following years also remained static, indicating the data didn’t fundamentally alter the perceived Fed policy path. The average monthly job gain, adjusted for Fed Chair Powell’s assessment that payroll numbers overstate reality by approximately 60,000, was a loss of 50,000 jobs over the past four months – slightly worse than the 20,000 average loss Powell had previously indicated.

The Powell Rubric & Data Adjustments

Fed Chair Powell has suggested that payroll numbers are overstated by around 60,000 per month. Applying this “Powell Rubric” to the recent data reveals a more concerning trend. The four-month average job gain, adjusted for this overstatement, translates to a 50,000 job loss per month. However, considering the entire year to date, the adjusted average job loss is only 5,000 per month, which is better than Powell’s initial estimate of 20,000. This discrepancy highlights the complexity of interpreting the data and the Fed’s broader perspective.

Upcoming CPI Data & Inflation Dynamics

The next key event is the release of the November CPI data, as October data was unavailable due to the government shutdown. Expectations are for a 3% year-on-year inflation rate for both headline and core CPI. The primary driver of inflation, according to Powell, is services inflation, which is believed to be easing. The Fed anticipates that a one-time level adjustment in goods prices due to tariffs will rebase out of year-on-year calculations by April, providing a clearer picture of underlying inflation.

The Cleveland Fed’s “nowcast” predicts steady inflation for both core and headline CPI, aligning with recent ISM data showing a moderating influence on inflation. However, S&P Global PMI data suggests a slight uptick in services input prices, potentially foreshadowing a slightly higher CPI reading. Even if CPI is slightly higher, it may not significantly alter the Fed’s course, as the core argument remains focused on the re-basing of tariff-related price increases.

Global Economic Landscape & Policy Divergence

Beyond the US, the European Central Bank (ECB) is expected to remain inactive, with minimal changes to its policy outlook. The Eurozone economy has shown cautious rebounding but has recently stalled. The Bank of England (BoE) is expected to implement a rate cut, already priced into the market. UK inflation fell slightly to 3.2%, but remains above the BoE’s target.

The Japanese Yen showed the most significant movement, likely ahead of a contentious Bank of Japan (BoJ) policy announcement.

Market Positioning & Risk Sentiment

The speaker maintains a long position in gold and is positioned on both sides of the dollar (long pound and euro). A short position in Australian dollar reflects a risk-off perspective. Put verticals in Bitcoin, held for months, continue to provide some profit. The overall baseline remains that continued disappointment in data regarding Fed rate cuts will likely reinforce the risk-off view.

Notable Quote: “Markets want action and that’s how we resolved post Fed on Friday last week. We resolve the same way when people digest these numbers and go ah well these numbers don’t imply action.” – Spac, highlighting the market’s desire for decisive policy moves.

Technical Terms

• NFP (Non-Farm Payrolls): The net change in the number of jobs added or lost in the US economy, excluding farm jobs.
• Basis Points (bps): A unit of measurement used in finance to describe the percentage change in an interest rate or yield. 100 bps equals 1%.
• PMI (Purchasing Managers' Index): An economic indicator derived from monthly surveys of private sector companies, providing insights into business conditions.
• Nowcast: A forecast that uses real-time data to provide a current estimate of economic activity.
• Vertical Spread (Put Vertical): An options strategy involving buying and selling put options with the same expiration date but different strike prices.
• Duration: A measure of the sensitivity of the price of a fixed-income asset to changes in interest rates.

Logical Connections

The video establishes a clear connection between economic data (jobs report, CPI expectations), Fed policy expectations, and market reactions. The disappointing jobs data led to a risk-off sentiment, similar to the reaction after the Fed meeting. The upcoming CPI data is presented as the next catalyst, with the potential to either reinforce the current risk-off trend or trigger a different response depending on whether it meets, exceeds, or falls short of expectations. The discussion of global central bank policies provides context for the broader economic landscape and potential currency movements.

Conclusion

The recent US jobs data, while weak, hasn’t fundamentally altered the market’s expectations for Fed policy. The upcoming CPI data will be crucial, but even a slightly higher reading may not be enough to derail the Fed’s current course. The prevailing risk-off sentiment is likely to persist as long as data continues to disappoint expectations for rate cuts. The speaker’s positioning reflects this outlook, with a focus on safe-haven assets and risk-off strategies. The overall message is one of cautious optimism, acknowledging the potential for volatility but maintaining a focus on long-term trends and fundamental analysis.