What just happened?
The US economy added 263,000 jobs in September, which is the smallest increase since April of last year, but is still higher than what economists were expecting.
The unemployment rate meanwhile fell to a new 50-year low of 3.5%, compared to 3.7% the month before.
The labor market’s participation rate fell ever so slightly to 62.3%, from 62.4%, as more working-age Americans opted to drop out of the labor market, rather than look for work.
What does this mean?
This wasn’t the cooling the Fed was hoping for. They’ve been trying to rein in the country’s still-high inflation with a series of aggressive rate hikes. And the strength of the labor market isn’t helping. See, a buoyant labor market means that companies will have to continue offering higher wages to attract workers, and then will pass those expenses along to their consumers in the form of higher prices.
So the US economy is likely to see more of the same thing: more inflation and more rate hikes.
If you’re looking for a silver lining, it may be this: the robust labor market indicates that the US economy is probably in better shape than many feared. But how well it will endure a continuing series of aggressive interest rate hikes from the Fed is an open question. Remember: as we explained here, the labor market is one of the last dominoes to fall when interest rates rise, meaning that if it’s still strong today, it’s simply because it hasn’t yet felt the impact.
Why does this matter for your portfolio?
The Fed has just done three consecutive “jumbo” rate hikes of 0.75 percentage points apiece, and the prospect of even more of those is bad news for almost every asset. And the jobs report not only increases the odds that the Fed will announce another 0.75 “jumbo” increase in November, but it also raises the possibility of another one in December.
Such aggressive hikes are likely to push stock valuations lower, and they run the risk of eventually pushing the US economy into a deep recession, which will put further pressure on company earnings and severely dent demand for commodities. More worryingly, it also raises the risk that something “breaks” in the financial system. The recent crisis in the UK – with the Bank of England’s intervention and the soaring costs of protecting against defaults – show that cracks can begin to appear in the markets quickly. And the faster rates rise, the worse it could become.
From an investment standpoint, the only asset that’s likely to thrive in this environment is the US dollar. But as we warned, that comes with a whole different set of problems.
Let’s hope that those aggressive hikes will quickly push the economy and inflation lower. Because until then, good news will likely remain bad news…
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