Why Friday’s Jobs Report Puts Fed Policy at Risk (It’s Not Why You Think).

Economic data last week was disappointing, highlighted by the big jobs report miss on Friday.  But, the right way to look at Friday’s big miss (74K vs. estimates of 205K) is more “confusing” than outright “negative.”

The miss was so big, and so divergent from all other recent economic data and employment indicators, that the market (rightly or not) is dismissing the jobs report as a statistical anomaly based on weather, seasonality, holiday hiring, etc.
The bulls will say that’s the right way to look at the number, while the bears will view it as a classic example of investors “whistling past the graveyard” and simply dismissing numbers they don’t like.

Time will tell who is right, and we’ll get a good idea over the next few weeks as more data comes out, but for now the benefit of the doubt goes with the bulls. (The number is so far off that it makes more sense on the surface that this is an anomaly.)

While everyone focused on the miss, the more-important part of the jobs report was actually the 6.7% unemployment rate, down from 7%.  I know the unemployment rate (UR) fell because the labor participation rate sank, making it not the positive it seems to be.  But, the reason the number is important is because the UR rate is now within striking distance of the 6.5% UR threshold the Fed has cited as potentially warranting an increase in interest rates.

Now, no one thinks the Fed will raise rates when the UR hits 6.5%, but the point is that this may require the Fed to provide more clarity on its “Forward Guidance.”

Remember, forward guidance is all a confidence game—  it only works as long as the market believes it.   If we hit 6.5% and the Fed doesn’t clarify or lower the UR threshold (say from 6.5% to 6.0%), then it may serve to discredit “Forward Guidance,” which may then result in a spike higher in interest rates.  And, that would be bad for equities.  So, what the Fed says about the UR threshold going forward will be important to watch.

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