The Mythical Soft Landing Looks Slightly More Achievable

The snap financial market reaction to Friday’s payrolls data was a classic example of “good news is bad news.” The US produced more jobs than economists had forecast, ratifying the notion that the Federal Reserve would have to keep pushing interest rates higher to curb the highest inflation in four decades. Bond yields initially rose and stock futures fell. But markets quickly rethought that narrative, and rightly so. A deep dive into the data show that an optimistic scenario for labor markets and inflation remains intact.

Consider average hourly earnings, which is part of the Labor Department report that showed 261,000 nonfarm jobs were created in October, above the 193,000 estimate. Although the wage metric rose just slightly more than expected last month — 0.4% from September versus the 0.3% forecast — the overall trajectory when using a three month annualized metric to smooth out month-to-month volatility shows that earnings inflation continues to cool, even without a significant increase in unemployment. That data confirmed the most recent signal from the employment cost index, a higher-quality but less timely gauge of labor market costs. That may help explain why yields on two-year US Treasury notes reversed their increase and fell and the S&P 500 Index began to rally hard.