Why Markets May Reject Upbeat US Jobs Data Amid the Iran War
Why Markets May Reject Upbeat US Jobs Data Amid the Iran War
By:Ilya Spivak
Stocks and bonds may fall again while the dollar gains after deceptively upbeat US jobs data.
- Payrolls growth topped forecasts while the unemployment rate fell in March
- Lopsided job creation leaves the economy vulnerable to cyclical disruptions
- Markets may sour on fears of a slow Fed response to Iran war recession risk
While most of the world’s financial markets settled into the Easter holiday weekend, the March edition of official US employment data surprised sharply to the upside. Traders may take a dismal view of the result however as the Fed struggles to respond to an inflation shock from the Iran war that threatens economic growth.
The Bureau of Labor Statistics (BLS) reported that the US economy added 178,000 jobs to nonfarm payrolls last month. That topped economists’ median forecasts calling for a rise of 60,000. The unemployment rate unexpectedly declined to 4.3%, matching January’s reading and reversing February’s rise to 4.4%.
While that appears encouraging at face value, a look under the surface reveals something less rosy. The labor force participation rate declined to 61.9%, the lowest since November 2021. Statistically speaking, that surely accounts for a good bit of the drop in the jobless rate. Those not looking for work are not counted as “unemployed”.
Lopsided US jobs growth leaves the economy vulnerable
Meanwhile, payroll gains in the “Education and Healthcare” sector continued to contribute an outsized share of job creation, accounting for 91k of the 178k increase. The drop-off for second- and third-place performance is dramatic. “Leisure and Hospitality” added 44k jobs while “Construction” contributed 26k.
An ageing population seems to explain resilience in the healthcare space. The cohort of Americans aged 55 years or more has hit nearly 105 million and their share of the population is up to 30.6% - both record highs – while their labor force participation rate is down to the lowest in 11 years at 37.2%. That number is 83.8% for those aged 24-54 years.
On one hand, this means that the current engine of US job creation is structural, making it somewhat insulated from near-term business cycle fluctuations. On the other, this warns that those parts of employment growth that are cyclical are limping along at best. This makes the US vulnerable to shocks where layoffs overwhelm structural job gains.
The markets fear the Fed will be too late to stop recession
The markets increasingly fear that the US-Iran war could be just such a shock. Traders seem to suspect that the conflict has already gone on long enough to evolve from a spike in prices – their initial interpretation – to a recession risk. Tellingly, inflation expectations baked into the bond market have cooled even as oil prices march higher.
Federal Reserve interest rate cut expectations priced into the futures market have collapsed since the war began, reflecting the inflationary jolt from the closure of the Strait of Hormuz. The central bank will be hard-pressed to act until it can assess how high price growth is likely to spike, and for how long.
The jobs report seems to provide them cover for this wait-and-see approach. For traders, this means that stimulus is not forthcoming until elevated prices hurt the economy in earnest. By that time, the lopsided labor market might make for a sharp implosion of demand rather than a gradual deceleration.
What this implies for asset markets seems ominous. Stocks and bonds may resume last month’s parallel decline while the US dollar marches higher, buoyed by sticky interest rates and liquidity haven demand amid risk aversion. The currency moved suggestively higher after the jobs data crossed the wires.
Ilya Spivak, tastylive head of global macro, has over 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak
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