Markets: The Payrolls Test

The reaction to today’s strong

payrolls report will say a lot about just how bullish the market really

is. Both the stock and bond markets have been a little Alice-in-Wonderland of

late, rising on bad news in the expectation, we’re told, that more bad news

means more rate cuts in the future. Now, however, it looks much more likely

that we’re stuck

at 4.75%.

In the grand scheme of things, this is good news. It means less chance of a

recession and less chance of inflation. It means that the economy is

robust enough to weather housing-sector weakness, especially with a weak dollar

starting to feed through into export figures. But it also means that Wall Street

can’t just sit back and wait for its free lunch rate cuts:

real businessmen in the real economy have to actually go out and work

for their profits. If the reaction to the payrolls report is particularly bearish,

then that might be a sign of the markets coming round to reality.

One other point is worth making, however: the monthly payrolls report, for

all that it’s the most important economic data release for the markets, is in

reality increasingly

meaningless. The Fed won’t hold off easing on the strength of this one report

alone, and neither the market nor economists should read too much into it, especially

when so much of the labor-force growth might have come from quirks surrounding

employment dates in the public-sector school system.

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