Friday's High-Stakes Jobs Report
The first U.S. jobs report of the new year, to be released Friday, will pit Wall Street against Main Street.
Stock markets, which are reeling from destabilizing volatility and sharp losses, would benefit from a weak report for December that would compel the Federal Reserve to slow, or even stop, the interest rate hiking cycle it initiated last month. By contrast, Main Street will be rooting for robust job creation to continue, especially if a strong report includes a much-needed increase in workers' wages.
Over the longer term, however, a thriving economy is in the vital interest of both Main Street and Wall Street.
The solid pace of job creation last year was the main reason the Fed decided in December to start normalizing interest rates that had been floored at zero since the 2008 global financial crisis. As slack is further reduced in the labor market, wage growth would likely pick up -- thus enabling the central bank to meet over time both its employment and inflation targets.
Although most Americans would welcome continuing job growth, today’s financial markets may view the trend with a measure of ambivalence. On the one hand, it accelerates the nation's economic healing and improves the longer-term prospects for corporate earnings, eventually providing a firmer foundation for asset prices. Yet the solid employment picture also would encourage the Fed to continue hiking interest rates. Those increases would reduce the supply of immediate liquidity support from the central bank to the markets that has been so effective in suppressing volatility, and that too many investors have been conditioned to take for granted.
The removal of that support adds to the insecurity of markets that have been struggling to cope with China’s economic slowdown and geopolitical tensions in the Middle East and Asia.
If the latest employment figures released on Friday were to show solid job creation along with a further pickup in wage growth, they would be good news for the U.S. economy, which still lags in delivering large and inclusive economic gains. A robust employment situation would improve prospects for 2016, and help offset the detrimental effect that years of low growth have had on the economy’s future potential.
But a strong report also would make it very difficult for the Fed to decide against hiking interest rates again in the first quarter of the year. That would further reduce the monetary stimulus the Fed provides to the markets and deepen the policy divergence with other systemically important central banks (particularly, the European Central bank, the People’s bank of China and the Bank of Japan), which all remain committed to extraordinary measures to boost their respective economies.
The result, at least in the short term, would be to add to the pressures on financial markets that are struggling to find an anchor as they cope with pockets of illiquidity and price overshoots. And the greater such pressures become, the higher the risk of unfavorable spillback to the economy.
Fortunately, this tug-of-war is a short-term phenomenon. Over the longer term, the interests of main Street and Wall Street converge.
Both the economy and markets need stronger fundamentals, which are the path to sustaining growth, validating asset prices and enabling the Fed to normalize policies. But first the contradictory needs of Main Street and Wall Street will have to be reconciled. And only a “goldilocks” job report -- neither too hot nor too cold -- can achieve that goal.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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Mohamed A. El-Erian at firstname.lastname@example.org
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