The Jobs Market Voted Last Week, But Results are Not In Yet

After Friday’s jobs report and ahead of today’s election, Steve Sosnick, IBKR’s Chief Strategist, and Jose Torres, Senior Economist, sit down for their monthly economic podcast discussion to ponder the market impacts of both events.

Summary – IBKR Podcasts Ep. 203

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Steve Sosnick 

Hello, everybody. Welcome to the latest edition of Interactive Brokers podcasts. Today we’re doing our monthly economic podcast. We have a shorter staff than usual because Andrew Wilkinson is taking a well-deserved day off.  You’ve got myself, Steve Sosnick, joined by Jose Torres, our Senior Economist. And let’s get right into it. 

Jose, what’s your take on the jobs numbers that came out on Friday? 

Jose Torres 

Steve, data has been really cloudy and murky. We’ve had to deal with the effects of the two hurricanes, as well as the Boeing labor strike. The data was really all over the place. In fact, the BLS jobs report reflected job growth of only 12,000 positions, but data released two days prior by ADP reflected job growth up to 233,000. 

So, notice one private sector source depicts a sharp acceleration. The public sector source depicts a sharp deceleration. Effectively, once you have job growth south of 70,000, we start to really get nervous because we think that recession is right around the corner. But because of unemployment claims sandwiched in the middle of those two reports last Thursday reflected pretty healthy labor demand, both in the initial and continuing claim side, I’m ready to just say, “forget this week. Let’s look forward to data in the next coming months.” 

Steve Sosnick 

Didn’t the BLS put in kind of a decent caveat there? I don’t recall them being quite so clear with their caveat of saying, almost in effect saying, “don’t rely on these numbers, we can’t rely on these numbers.” Do you remember, I vaguely remember them doing stuff like that in the past. Do you remember many of those types of caveats or warning labels placed on their data? 

Jose Torres 

I remember during Hurricane Katrina, there were a few reports that were, blunted back a long time ago. That was roughly almost two decades ago, but more recently during the COVID months, it became really difficult to measure the changing labor market and folks with multiple jobs or folks with self-employment and the labor force shifting so fast in and out of work. So, we’ve had sort of these periods and what we need to do is really rely on the buffet of information and look at the totality of the data rather than one specific source. 

In fact, since the pandemic, Steve, we’ve begun to rely on a lot more sources for these measures. Look at retail sales. CNBC has their new retail sales measure. ADP came out with their jobs report to rival the BLS jobs report. 

And that’s how we’re transitioning forward in the economic and financial market space is just by having a lot more data and aggregating all of it. 

Steve Sosnick 

My read on ADP has always been that they’re correct in terms of the plus-minus, but they’re really not a great predictor, especially this time where they were really divergent from the public number. In a case like this, which do you tend to trust? 

Jose Torres 

Steve, I’m actually starting to favor the ADP jobs report more than BLS. And let me tell you why. BLS really relies on response. In fact, a lot of the younger economists, when they start working at BLS, right out of college, right out of grad school, that was actually my path. You’re just stuck in a little cubicle with a long list of folks that you need to call so that they can participate in the data. 

If they don’t participate, then you end up estimating. The more you estimate, the more, of course, lower quality your data is, the more away from the mark, the wider the range of possible miscues. ADP, on the other hand, Steve, they have preferred HR supplier to many of America’s employers. 

So, they have a lot of hard data that they don’t really need to request voluntary participation for. It’s all in their database. 

Steve Sosnick 

Full disclosure, our paychecks come via ADP. Interactive Brokers is among those high-quality firms using ADP for their payrolls. So therefore then, let’s take it on, how much then also should we realize that with an unemployment rate of 4.1%, which is unchanged, and not exactly helping the Sahm Rule consensus, and also monthly hourly earnings rising by 0.4%, although the prior month was revised downward from 0.4% to 0.3%.  

These are still not exactly signs of labor market weakness. Should we be banking on labor market weakness or should we be realizing that the labor market really might not be nearly as tepid as people think? 

Or are we seeing some sort of, what I’m going to call the equivalent of disinflation in the labor market. Whereas things are not growing as quickly, but they’re still doing fine. Just as with disinflation being the change in the change of prices, the second derivative of prices, as it were.  Is that kind of what we’re seeing?  The labor market is in disinflation of labor rather than an actual weakening of labor? 

Jose Torres 

I think so. And I think the dynamics this time around are a lot different, right? Companies these days don’t wake up and say, “oh, we need to get rid of labor.” It’s not like that because corporate balance sheets are really strong, and folks don’t want to get caught offsides with not enough roster depth if the economy reaccelerates. 

So, companies think more so along the lines of let me not replace job leavers, right? And that’s why we’re seeing continuing claims have a widening gap versus initial claims than normal, right? So, we’re seeing slowing along those lines, but when you have job growth still in excess of 100,000, and that’s what we’re seeing in the three-month moving averages. The labor market is slowing, but it’s still very healthy like you said.   

In fact, 0.4% wage pressures still tells a story of strong core inflation.  And the reason that inflation is now closer to the Fed’s target is a big determinant is really cratering oil prices and reduce charges for goods or services, which are labor intensive, still have an inflationary impact, still pretty strong. 

Steve Sosnick 

We are seeing basically a solid labor economy. If you took this in a vacuum and I would say, politics aside — which of course is impossible as we’re taping this literally the day before Election Day – if you step back and said, okay, we have an environment where call it 96% of the people who want jobs have jobs. A 4.1% unemployment rate is historically quite enviable. And we’ve gotten ourselves into a situation where monthly average labor costs are rising faster than CPI. Why is the Fed concerned? What is the worry here? 

Jose Torres 

I spoke with Kathleen Hays last week, and there’s just been a bias towards accommodation, towards volatility quelling in the economy and in financial markets. So, at the first look out a weaker jobs report or weaker retail sales report, the immediate bias is to immediately start reducing and it’s to start accommodating. 

I think it’s a mistake, but I have more of a bias towards positive real rates. And just for so long, Steve, we’ve been in the negative real rate regime since post Great Financial Crisis, so now that we’re in this positive real rate regime and the Fed feels that “oh wow, look, we’re in the mid-fours, mid-to high-fours, and inflation is down in the twos. Wow, we must rush down.”  

But when you look at the liquidity amounts out there, when you look at financial conditions, when you look at credit spreads, all very light and pointing to a Fed funds rate that’s probably closer to neutral rather than restrictive. 

Steve Sosnick 

I completely agree with you on that point. So. in many cases, it’s not a very exciting podcast if people are hoping for a counterpoint on this, but I’ve been saying this all along. When you have credit spreads at almost record tightness, real interest rates at historical norms.  Those of us who were in the business before the global financial crisis, a 2% real interest rate was normal. 

And quite frankly, I guess what it comes down to is you have this bias between higher real interest rates help savers, low real interest rates help borrowers. I guess the more addicted to debt we become as an economy, that biases us more toward low real interest rates because more people helped. And quite frankly, the guy who’s most in charge of setting real interest rates was a private equity guy. 

Their business model is borrow money to buy companies. So he is in many ways, the debtor in chief. I’m not knocking Powell here, but his inherent bias, his money, his career has been made by borrowing money to buy real assets.  

And so obviously the lower the real interest rate, that’s probably just deeply ingrained in his psyche. I wrote a piece about this, like a couple of months ago, “Chairman Powell’s Biases”. And I do think that’s important here. 

And I do understand why. In general, most people have debts, and I guess we’re a debt laden economy and so that’s where it is. But I cannot agree with you more about the fact that I think we’re much closer to neutral than the Fed lets on, especially since they really won’t tell us where they think R squared is. 

Where do you think R squared is? And explain R squared as I just threw out a random term, economic term that everybody might not be familiar with. 

Jose Torres 

Sure. So the rate of equilibrium where you know, where the curves intersect. And I think a huge determinant here, Steve, is the 10-year yield and the long end of the curve really protesting the Fed’s move down 50 basis points. The 10-year is up roughly 65 bps or so from its September 18th level when the Fed cut 50 bps, really telling us that we can’t really depend on cratering oil prices forever. 

We can’t depend on goods charges declining into eternity. And that at some point, if goods costs and oil prices begin to rebound, all of a sudden, those two factors combined with the services inflation that we have, that’s running roughly three to three and a half percent, right? You look at the core PC that just came out, it was at 0.3% month over month, right? Short term measure, but still down the line, you could have some inflation. And then you also have of course the effects of the election. You have deficit spending the likely case under both candidates. If you look at our Interactive Brokers Forecast Trader Marketplace, national debts are expected to increase under both candidates. And then also, there’s folks’ growth expectations, right? Folks think that if the Republicans gain more controls or higher odds of deregulation, lower corporate tax rates, which in the short term could help a lot of the areas of the market that have been left behind. 

And then on the other side, with Democrats, there’s possibility of maybe higher taxes and maybe firmer regulations. So, folks are considering that as well on the long end of the curve. 

Steve Sosnick 

Yeah. Again, you of course mentioned Forecast Trader. I’ve been in touch with my colleagues who are making sure that this thing was up and running and I think one of the terms that one of them used was just phenomenal the amount of activity that we’ve seen on it related to the election. 

That said, it’s my contention that the markets have not voted and probably will not really vote. Because at this point when you’re talking about something that’s a coin flip and again, looking at Forecast Trader, it’s essentially gotten back to coin flip odds. I think it’s very difficult for investors, particularly long-term investors, particularly portfolio managers, where it’s more akin to steering a battleship or an aircraft carrier. 

You can’t necessarily do that so quickly. I think a lot of them have chosen not to vote and they’ll see what happens.  

And on that note, think we’re going to wrap it up here. So, I want to thank my colleague, Jose Torres. I want to thank all of you for listening and sticking with us through this podcast. This is Steve Sosnick saying goodbye and thank you. And thank you for listening in and of course, be sure to find all our IBKR podcasts in all the usual places. Take care, everybody. 

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