The U. S. labor development reported that in April, workforce added 266,000 new jobs, substantially lower than 1 million that was projected by many economists and analysts. That number was much lower than 770,000 jobs in March and 536,000 jobs in February, and it broke the upward trend. The unemployment rates stood 6.1%, and 9.8 million people are unemployed.
Upon release of the data last Friday the U. S. market responded initially by jump of U. S. 10-year yield, selling off bank stocks, and buying tech stocks. But that episode did not last long. The market quickly reversed its course as people tried to rationalize the unexpected job data:
- Extended unemployment benefits provided by the government could have discouraged some people to look for or to accept jobs.
- Better job market might have prompted some people to hunt for better jobs.
- Tight supply chain amid economy open, in particular chip shortages, might have lead some company to delay hiring.
Following the new monetary framework, the Fed will focus more on maximizing employment than maintaining price stability in the next few years. The market reacted in line with the Fed, as bad job data confirms that the Fed will maintain the current ultra easy policy in place, therefore yield down, tech stocks up.
However, the market, rationally, acts from risk aversion perspective. It focuses more on price stability, i.e., inflation, and less on employment. This was true in 2019 when full employment was reached, stock prices kept record highs as inflation was low. There are evidences of price increases for a number of items, such as gasoline and lumber. Warren Buffett talked about the price pressures that were reported by some of his companies during his annual shareholder meeting. I think the market will not feel comfortable if any data suggesting inflation over 2%.
The Fed will interpret any near term inflation to be transitory, and will emphasize its monetary target to be average inflation over a period of time (rather than an instant number), and unemployment has yet to be improved substantially. However, the market, specifically, the tech sector will sell off any way, if inflation that is close to 2% is confirmed, regardless it is a single data at a single point.
In short, for now there is a divergence in focus by the Fed and by the market: the Fed values jobs, the market values money.