Markets are heading into Friday’s jobs report on edge…
Will unemployment claims tick up or down? And will the Federal Reserve take action as a result?
Unfortunately, I expect this week’s labor data will send a misleading signal about the strength of the economy — and that signal could push the market toward pricing in an imminent Fed rate hike.
That means Friday could bring a sharp reaction across stocks, gold and other interest-rate-sensitive assets.
In today’s video, I’ll tell you which specific number I’m watching, why I think the market is interpreting it incorrectly — and how investors should prepare.
Click below to watch:
Video Transcript:
Welcome to Moneyball Economics, I’m Andrew Zatlin.
And guess what?
It’s that time of the month when payroll data will be released on Friday, except this time it’s far from an ordinary release.
See, the markets are very much on edge right now, and depending on the data that comes out Friday, the markets are going to respond very strongly. I think I know exactly what’s going to happen on Friday, and I want to tell you and help you prepare for it.
But first, let me start by explaining why the markets are so on edge. It has everything to do with an imminent interest rate hike. Now, a lot of this rate hike has been priced in. You raise interest rates, well, that’s a death blow for gold prices. It hits high tech. Notice how lately high tech prices have been slipping. That’s because some of this interest rate hike is getting priced in, but it’s not done yet.
The reason the markets are on edge is primarily not because an interest rate hike is going to happen, it’s that we don’t have clear visibility to when it’s going to happen. Thanks to the new Fed chairman Warsh, there’s a lot less communication coming out from the Fed.
And so every month that goes by, the markets think this is it. We’re finally there. And as a matter of fact, we actually might finally be there. The next Fed meeting is in September at the end, and the data that comes out Friday might be the final nail in the coffin.
If it doesn’t lead to a rate hike on this month, well, guess what? October’s kind of out of the running two weeks before the midterm elections. So that means November or December might see a rate hike. And again, it’s this constant will they or won’t they?
We know they’re going to, but when? It does beg the question though, why do we expect a rate hike? Well, partly because that’s what the Fed governors have been pretty much saying, literally. The Fed governors have been saying all summer long, the time has come. It’s time to raise interest rates. But there’s another reason why the markets expect a rate hike, and it’s again for the same reason that the Fed’s communicating.
We have high inflation that has been sticky for too long. And according to our economic textbooks, Economics 101 says when inflation’s higher than you want, raise interest rates and the economy slows and inflation comes down.
And guess what? Over the past few months, all the data from the inflation side of the story has said inflation’s high and a lot higher than the target. What’s missing though has been other macroeconomic data, especially the labor market.
So let’s take a step back and let’s kind of talk about how we got here.
What’s the story really? Well, ultimately the story is we are leaving one economic cycle, the COVID economic cycle, and entering a net new economic cycle that I like to call the Trump cycle. The COVID cycle, remember that? That’s when we threw $25 trillion at the economy and it boomed. And then when we stopped throwing money at the economy, it crashed, it busted. And that bust started happening in 2024.
We saw it in the form of hundreds of thousands of people being laid off, no payroll hiring, GDP slowing down pretty fast. In fact, the Fed had to cut interest rates.
Well, fast-forward, 2024 and even into 2025, companies were still right-sizing. The economy was still kind of rocky, finding its sea legs, but it did. Now, when you transition from one economic cycle to another, the data’s not uniform immediately.
It’s not like all these macroeconomic data points line up and point in one single file to a particular destination. Instead, some data comes out looking strong, some data comes out looking weak, and it takes a while for all the data to start getting consistent, and that’s kind of where we are. The data for inflation has been getting consistent.
Now remember, because of COVID and throwing money out there, we had just massive insane inflation, double-digit inflation. And under Biden, it stayed sticky up, but it was trending down. Well, enter the Iran war, enter an oil shock. Inflation was suddenly spiking. In fact, inflation in the near term has peaked at around 4% or so.
There are different ways to measure inflation, by the way. There’s consumer inflation, CPI, there’s producer inflation, PPI, and then there’s the Fed preferred inflation, which came out last week. It’s personal consumption expenditure inflation.
All three of these data points are looking at inflation in different ways, but they’re all sending the same signal. Inflation since February, March, basically the Iran war has jumped up and it’s been stickier. CPI, PPI kind of starting to come down a little, not a lot, and it doesn’t really matter whether we’re looking at the PCE version of inflation or CPI, inflation’s up, it’s around 4% and the Fed wants it down around 2%.
So what do you do?
Well, off on the side, I’m not a Fed governor, but I know what you do. You sit tight. Economics 101 says inflation high, raise interest rates, inflation come down because economy gets slowed. Except in this case, raising interest rates isn’t going to do a damn thing except slow the economy. The inflation we’re experiencing is because we have an oil shock. It’s because oil is almost $100 a barrel when it was $60 a barrel.
You can raise interest rates all you want. It doesn’t make oil more available or oil prices come down. You’re not really hitting the basis for this inflationary impulse. But nevertheless, these higher paid, smarter people than me are thinking that is the path forward. They’ve been holding back primarily because the labor market question is still on the table. If you slow the economy by raising interest rates, well, guess what? It’s going to have a blow back and you’re going to see less hiring.
Can the economy afford less hiring? Well, it’s interesting you say that and ask that question because we haven’t had any hiring in two going on three years. In fact, last month hiring went negative. So the payroll story does not help suggest we should raise interest rates. So again, the question is why do we think interest rates are imminently going to go up?
Well, because there’s other data that’s been coming out regarding the labor market. Jobless claims, super low, kissing 200,000 consistently all summer long. 200,000 is that line in the sand that says, oh my God, the economy’s super strong.
And if it were to slow down, okay, you’d get a little bit more jobless claims, but it’s still saying the economy’s expanding. And yes, no payrolls, jobless claims, kind of countering that whole labor market strong, weak, but we’ve got another data point. And this is the one that matters most right now, unemployment. Unemployment fell to 4.1%. And let me contextualize that for a second. Traditionally, in a normal healthy economy, unemployment’s going to be about five, five and a half percent. We have had sub 5% for a long time. Now, if you’re out there thinking, I’m going to raise interest rates, but I know there’s a blow back on the economy and it will somehow get reflected in things like unemployment, unemployment’s going to go up.
Well, guess what? You’d have to throw out about a million people out there in additional unemployed in order to go from where we are today, 4.1% to 5%. Remember, I just said 5% is considered a strong economy. And so the unemployment rate is now what matters most. It’s the last thing that the Fed wants to look at in order to make their decision.
What do I think is going to happen with the unemployment rate this Friday? This is where things get really weird. Okay. Over the past six to eight months, the unemployment rate has steadily gone down. And like I said, it just recently hit 4.1% last month.
Why has it gone down? It’s gone down for exactly the same reason that jobless claims have gone down. We’ve kicked out a few million people. A lot of them were workers. Let me explain what I mean.
Take jobless claims…
Let’s assume that for every million people working, some portion of them are going to be laid off. They’re not going to have a job and they’re going to raise their hand and say, “I would like to file for my jobless benefits.” Well, when you kick out three million people, a lot of whom were working, guess what? You’re going to have fewer people here to raise their hand and say, “I deserve jobless benefits.”
As a result, jobless claims went down, not because the economy’s strong, not because labor demand is strong, just because the pool of workers shrank. The same thing applies to what we’re seeing in the unemployment numbers. The unemployment rate is a numerator and a denominator. The denominator is the size of the civilian workforce. It’s about, let’s say 130 million people plus or minus are the available pool of workers.
And then you’ve got a group who are not working and would like to work. Those are unemployed. You take the number of people who are unemployed and you divide it by the number of people who could be working, and that’s your unemployment rate. 130 million is your denominator. Well, that numerator, the number of people unemployed last year before we went on this deportation binge was about 7.3 million people. This year, going back about six, seven months, it was about seven million people.
We’re now down to 6.3 million people who say, “I’m unemployed.” In essence, the reason unemployment has been going down is because fewer people are saying, “I’m unemployed.”
And I’m telling you, fewer people say they’re unemployed is because we kicked out millions of people. Big number of them were raising their hand and saying, “I’m unemployed.” All we’ve done is we’re playing with numbers.
The actual state of affairs in the labor market has not changed. All we’ve done is just kicked out a few participants, and that has led us to say, “Oh, look at that. The labor market’s tighter.” It isn’t. We’ve simply kicked out people who were, for better or worse, part of the unemployment system.
This Friday, we’re going to get another look at unemployment. Let’s talk the math. If the denominator stays flat, we’re at 4.1%. We would have to see another 150,000 people between last month and this month raise their hand and say, “I’m unemployed.” If they did that, unemployment rate will go from 4.1 to 4.2%.
And you know what the markets will say? So what? We are still at a freakishly low level of unemployment. We can afford to raise interest rates. And so folks, I believe this Friday we’re going to be between 4.1 and 4.2% because again, it’s a rounding error that will move things.
4.1, 4.2%, the markets are going to puke. You are going to see everybody in a major selloff, dividend stocks. Guess what? Your dividends are worth less at a higher interest rate. Gold, worth less at a higher interest rate.
I believe high tech is going to take it in the chin. Be prepared for really bad news. If the unemployment rate comes out 4.1%, you can expect the markets to puke. And then later on this month in September when the Fed comes out, guess what?
The markets are going to puke even further because they’re going to anticipate a rate hike. And for all intents and purposes, it probably will happen. But off on the side, I think all this is policy error.
I think a big mistake is going to be made if they raise interest rates because I don’t believe the economy is going to respond as positively as people might think.
I think the unemployment rate is a false signal right now for reasons that I’ve explained.
Has nothing to do with a strong or strengthening economy, everything to do with the fact that we just kicked people out of our country and now there’s fewer workers claiming they’re unemployed.
Get ready, buckle up. There will be bad news on Friday if you are long the market and there are ways to position for this and I hope you take them.
In the meantime, we’re in it to win it.
Zatlin out.
Andrew Zatlin
Editor, Moneyball Economics