The reaction to today’s strong
payrolls report will say a lot about just how bullish the market really
is. Both the stock and bond markets have been a little Alice-in-Wonderland of
late, rising on bad news in the expectation, we’re told, that more bad news
means more rate cuts in the future. Now, however, it looks much more likely
that we’re stuck
at 4.75%.
In the grand scheme of things, this is good news. It means less chance of a
recession and less chance of inflation. It means that the economy is
robust enough to weather housing-sector weakness, especially with a weak dollar
starting to feed through into export figures. But it also means that Wall Street
can’t just sit back and wait for its free lunch rate cuts:
real businessmen in the real economy have to actually go out and work
for their profits. If the reaction to the payrolls report is particularly bearish,
then that might be a sign of the markets coming round to reality.
One other point is worth making, however: the monthly payrolls report, for
all that it’s the most important economic data release for the markets, is in
reality increasingly
meaningless. The Fed won’t hold off easing on the strength of this one report
alone, and neither the market nor economists should read too much into it, especially
when so much of the labor-force growth might have come from quirks surrounding
employment dates in the public-sector school system.