Investors got a lift from Tuesday’s U.S. data, which showed the number of people quitting their jobs returned to 2019-like levels last month. It’s one of the few indicators from the labor market that’s returned to pre-pandemic conditions, analysts said.
Financial markets have been thirsting for any signs of a return to normal, defined as conditions in the labor market and economy which prevailed before the U.S. onset of COVID-19 in March 2020. They finally got one on Tuesday with a report that revealed the number of quitters sank to 3.5 million and touched the lowest level in 2½ years, although job openings were still above pre-crisis levels. Quits are strongly correlated to wage growth, and a falling number of them tends to reflect concerns about a weakening economy. Analysts tend to look past 2020’s extreme distortions.
Source: BLS, JPMorgan Chase & Co.
The reaction across asset prices was swift on Tuesday.
The 2-year Treasury yield BX:TMUBMUSD02Y, which is tied to expectations for Federal Reserve policy, headed for its biggest one-day decline in more than a month. Fed funds futures traders boosted the likelihood of no more interest-rate hikes from Fed officials this year, which would leave the main interest-rate target between 5.25%-5.5%. The ICE U.S. Dollar Index DXY, which trades according to where U.S. interest rates are likely to be headed relative to the rest of the world, fell 0.5%.
And all three major U.S. stock indexes DJIA SPX COMP were higher in New York afternoon trading, providing an example of how what might otherwise be regarded as bad news from the labor market appeared to be translating into good news for equity investors on Tuesday.
“A lot of markets, particularly the bond market and stock market, have been waiting for some softness out of the labor market, which is happening right now,” said Lawrence Gillum, the Charlotte, N.C.-based chief fixed income strategist at LPL Financial. “We’ll see what happens on Friday. But we are expecting August’s nonfarm payrolls to be softer than what we’ve seen earlier this year and could see the beginning of a soft patch for the labor market.”
“Markets are looking for data to confirm a soft landing and today’s report confirms some of that,” Gillum said via phone. Even though the S&P 500 index is up almost 17% this year, equity markets have the potential to hit record highs if corporate earnings continue to hold up, he said. However, sideways trading is likely, considering the advance already seen this year, according to the strategist.
Meanwhile, light summertime trading in the Treasury market ahead of the Labor Day holiday weekend is reducing liquidity, making it harder to gauge the sentiment of traders who may be reversing short positions, according to Gillum.
Friday’s nonfarm payrolls report for August is expected to show a gain of 170,000 jobs, down from 187,000 the prior month, based on the median estimate of economists polled by The Wall Street Journal.
Higher gasoline prices seen this month have the potential to impact the August consumer price index, which is set to be released on Sept. 13, and keep the headline inflation rate elevated relative to July’s 3.2% reading.
“The inflation data we got from July is not factoring in the recent rise in energy prices this month,” said Lauren Henderson, an economist at Stifel, Nicolaus & Co. in Chicago. “The rate of disinflation is proving to be slower, as of late. And we think that because of the sticky nature of inflation, the Fed will likely have to engage in at least one additional rate hike by year-end. We are not in agreement with the market that the Fed is done.”
“Overall, the economy has proven stronger than expected with consumers leading the charge,” she said via phone. However, Tuesday’s data reflected the second straight month in which the number of people quitting has fallen back toward pre-pandemic levels, and “is certainly a step in the right direction to rebalance the labor market.”