Friday’s Jobs Report: 4 Keys To Stock Market Reaction

Forecasts for Friday’s jobs report suggest that the U.S. economy added 543,000 jobs and the unemployment rate eased to 4.5% in November. The average hourly private-sector wage likely rose 0.4% on the month and 5% from a year ago, contributing to inflation pressures. But will the report matter for the stock market at a time when the world is on tenterhooks waiting for clarity about the impact of omicron variant?


Here are four key things to keep in mind.

Strong Jobs Report May Mean Faster Federal Reserve Taper

Federal Reserve chief Jerome Powell indicated on Tuesday that policymakers will discuss speeding up the wind-down of asset purchases at the Dec. 14-15 meeting. A strong jobs report, followed by another elevated inflation reading, would make that outcome all but certain — if not for the sudden emergence of the omicron coronavirus variant.

The Omicron Variant May Sink Economic Outlook

In appearances before Congress this week, Powell outlined a much more hawkish policy outlook amid growing concerns about persistently high inflation. Yet he also made clear that his hawkish turn reflects a baseline view of the U.S. economy. The omicron variant is too new to have altered that baseline, but that could change in a hurry.

Key questions remain about the effectiveness of vaccines and the severity of infections. However, Fed should have a better idea before this month’s meeting as to whether omicron will significantly shift the outlook.

If it looks bad, the economic baseline will be out the window, and the Fed will rethink the slope of its off-ramp from extraordinarily easy policy.

Stock Market May Not Love Either Scenario

If omicron isn’t a game-changer, stock market investors can look forward to the Fed following through on its hawkish turn. The implications extend well beyond a faster taper to a steady diet of rate hikes.

“The threat of persistently higher inflation has grown,” Powell said Tuesday. He said it was time to retire his earlier characterization of inflation as transitory.

In August 2020, after years of the inflation rate lagging their 2% target, Fed policymakers adopted average inflation targeting. The policy required the Fed to overshoot the 2% inflation target for some time to make up for prior weakness. That job is now complete, Powell essentially indicated on Tuesday.

The upshot: The Fed is no longer playing with kid gloves.

Of course, a hawkish Fed would be a huge blessing compared to a big wave of omicron hospitalizations and deaths. Omicron’s transmissibility and the possibility of much-reduced vaccine effectiveness could create a period of high risk, until new jabs become widely available after perhaps six months.

Government lockdowns are probably unlikely. Still, the economic hit could be compounded if Washington’s new obsession over inflation prevents any fiscal policy response.

Will Jobs Report Have A Silver Lining?

Unlike most jobs reports, this one probably won’t be judged based on the headline number of new jobs added. Here’s the key question: Will the labor market stay super-tight, or will the millions of workers who opted out of the labor force during the pandemic come off the sidelines? Other data points, such as the unemployment rate and labor force participation, will provide important clues.

Labor force participation is seen ticking up to 61.7% of the 16-and-up population.

In recent appearances, Powell has cast some doubt as to whether labor force participation will swell back toward pre-pandemic levels. If it doesn’t, then the labor market may not be all that far from full employment, and there may not be much to gain from letting inflation run above target.

Yet economists think that this fall’s lapse of pandemic unemployment benefits and school reopenings held down participation to at least some extent. A big increase in the number of workers in the labor force — meaning they’re either working or actively looking for a job — might signal a less inflationary outlook, with less upward pressure on wages. That would be a silver lining for the stock market at a time when the forecast looks cloudy.

Be sure to read IBD’s daily afternoon The Big Picture column to get the latest on the market trend and whether growth investors have a green light to buy quality stocks at proper entry points.

Please follow Jed Graham on Twitter @IBD_JGraham for coverage of economic policy and financial markets.


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