J.P. Morgan Private Bank Senior Markets Economist Stephanie Roth and Bank of America Senior U.S. Economist Aditya Bhave sit down with Yahoo Finance Live to break down the jobs data. "We kind of want to see a softening in the labor market. that is what the Fed is trying to achieve," Roth says. "So the fact that we saw a bit of a miss there is not necessarily a bad thing."
Roth goes on to point out that the Fed may be too preoccupied with future inflation prints, while Bhave believes the July jobs report is a healthy start to a soft landing scenario if it stays the course.
"The outlook has changed significantly. we went from an economy that was clearly decelerating to one holding up just fine and potentially slightly accelerating," Bhave says on stabilizing GDP data.
The economists also comment on how markets may respond to the jobs reading alongside the recent U.S. debt downgrade by Fitch Ratings.
JULIE HYMAN: With this $187,000 gain in jobs, I've been trying to dig through the industries here to see where the shortfall could potentially be.
Employment and professional and business services was down 8,000 in the month.
And temporary help services, temp jobs, continuing to trend down by 22,000.
Temp jobs are seen as a potential leading indicator for the rest of the job market.
That's something to continue to watch.
And then there was little change in a number of other industries like mining, which has been moribund for a long time, oil and gas extraction, manufacturing, retail trade as well, and transportation and warehousing.
Some interesting trends here that we are looking at in these numbers, but let's get some perspective now on these.
We're now joined by Stephanie Roth, JP Morgan Private Bank Senior Markets Economist, and Aditya Bhave who is Bank of America Senior Economist.
Thank you so much, both for being here.
Aditya, I'll start with you because you did get that wage growth that was a little hotter, but the overall number a little worse.
ADITYA BHAVE: I think this is a solid jobs report.
The 13,000 miss was relatively mild, the 50,000 Downward revision probably a little bit more significant.
But at the same time, as you said, wages were pretty strong and they beat expectations.
And the household survey also was solid.
I think it was up to 168,000 unemployment rate down.
So we've been making the point for a while that the household survey has some catching up to do with the establishment survey.
The fact that that's happening in the right direction rather than the establishment survey moving significantly downward towards the household survey again points to a solid job market.
Big picture we're still printing multiples of what breakeven is, which is about $75,000 to $100,000, which means we continue to tighten the labor market rather than ease it up.
JULIE HYMAN: Stephanie.
STEPHANIE ROTH: Yeah, totally agree there.
The jobs market was pretty solid in the month.
The establishment survey was a little bit softer than the household survey.
But overall, the picture is pretty good.
And by the way, we want to see a softening in the labor market if that's what the Fed is trying to achieve.
The fact that we saw a little bit of a miss there is not necessarily a bad thing.
On average hourly earnings, it's not really the best measure of wage inflation.
We got ECI out just a little while ago, and that showed a labor market continuing to soften from a wage perspective.
So that's really the gold standard when it comes to wages.
Average hourly earnings are a lot more noisy.
I would say it's solid labor market, but signs of cooling to some extent.
JARED BLIKRE: Well, let me just ask you to follow up on that.
What do you think the Fed is thinking right now, Jerome Powell, looking at these numbers?
STEPHANIE ROTH: I think he's probably feeling OK about that.
Granted before the next meeting, they have another two CPI prints and another payrolls print.
So this probably doesn't really change the view from what's going to happen at the next meeting, they have a lot of data between now and then.
BRIAN SOZZI: Stephanie, is this a perfect jobs report for the markets?
To me, I'm very surprised that markets have held up the way they have this week, especially off of that credit rating downgrade, but not too hot, not too cold.
STEPHANIE ROTH: I think from that perspective, it's a Goldilocks print outside of the average hourly earnings number, which was a bit strong.
The thing is what's been driving rates for much of this week has been the long end selling off unrelated to expectations of what's going to happen from the Fed more about a term premium issue.
JULIE HYMAN: Aditya, your team made some headlines this week by changing your call for a US recession.
Saying it's not-- you thought it was going to happen, now you're looking more for a soft landing.
Walk us through that and talk to us about whether this report helps support that thesis.
ADITYA BHAVE: The simplest way to think about it is that several weeks ago, we were looking at 1% roughly first quarter GDP, and probably looking at another 1% in the second quarter.
Then the first quarter got revised up to 2%, and the second quarter printed at 2.4%.
So the outlook has changed significantly.
We went from an economy that was clearly decelerating to one that's holding up just fine and potentially slightly accelerating with housing and manufacturing, potentially finding a bottom.
For us, it's always been the trade off between uncertainty, particularly around credit tightening, versus very strong hard data.
At some point as the hard data continued to impress and surprise us to the upside, we had to put more weight on that rather than the uncertainty.
I don't think this latest jobs report really changes our view.
We knew the labor market would decelerate, as Stephanie said, that's good news from the Fed's perspective, but it's certainly not rolling over.
150,000, 180,000 is perfectly healthy.
As long as that continues, we think the economy still can move towards a soft landing.
BRIAN SOZZI: But does it continue to slow down from here?
Next month, are we at $100,000 or does it re-accelerate?
ADITYA BHAVE: It probably continues to slow down.
It's, of course, the pace of the slowdown that matters.
If we quickly crater towards zero, then it's a very different outlook from what we expect, which is a gradual slowdown towards 150 and then 100.
JARED BLIKRE: Aditya, what do you think about the yield curve, the long end racing up?
We actually have a lessening of the spread between the two and the 10 and the short end and the long end, so the inversion is shrinking.
Do you think it's possible that the long end simply races up?
I've heard some hedge fund managers, some famous ones on Twitter saying, well, we could eliminate the inversion just by the long end racing up.
Do you think that's possible?
ADITYA BHAVE: That is not the forecast of our rate strategist.
As Stephanie said, the move in the long end this week has not really been related to Fed expectations or what's going on with the economy, it's probably more related to the downgrade.
But certainly, obviously, you've erased some of the inversion.
We never thought of inversion as necessarily a signal of recession, more of a correlation story.
Again, that doesn't really change the outlook from our perspective.
Of course, if rates remain high for a longer period of time, then I think that creates some rollover risk in terms of credit.
BRIAN SOZZI: If we're looking at a few more months, Stephanie, of slowing job gains, does it pay off now to get more defensive with your portfolio?
STEPHANIE ROTH: Yeah, we've been defensive in portfolio positioning for much of this year.
We've been telling our clients to add to bonds, but that doesn't mean that clients should be staying away from stocks too.
We actually think that you could get a continued grind higher, especially in line with your view Aditya, that actually the potential for a soft landing is getting to be a bit more significant.
For clients to be sitting on the sidelines with cash doesn't really make sense.
We do think that clients should be adding into equities here as well.
We're a little bit more cognizant about valuation.
So we're talking more about mid-cap equities where you have the potential for upside and the valuations are a lot more attractive.
JULIE HYMAN: Guys, we mentioned the downgrade empassing.
While I have you here, I do want to get your take on it because here we are looking at an economy that seems to be still growing, might avoid a recession.
That's a scenario that gives us a little more leeway when it comes to things like US debt and the scenario that Fitch painted this week.
But at some point, the US economy will go into recession.
We don't know when, but inevitably, it will.
At that point, then maybe it becomes a little more problematic the debt situation in the US.
How should people be thinking about this?
We tend to be short termist as humans and as investors.
Do we need to be thinking longer term?
Aditya, I'll start with you on this one right.
ADITYA BHAVE: There is a concern about the level of debt.
It's probably more of a medium to long term concern.
But the good thing for the US is that ultimately, the dollar is the world's reserve currency and that doesn't look like it's changing anytime in the near future.
So betting against that will be very difficult from a market perspective.
But for sure deficits are blowing out, we don't see any signs of that reversing, and it'll get worse as and when we have a recession.
So it's something to watch for, but I would say it's more of a medium or long term concern rather than a near-term market concern.
JARED BLIKRE: What about the strengthening US dollar, does that pose a problem for you?
ADITYA BHAVE: The strengthening of the US dollar is probably a function of the fact that the US economy is outperforming the rest of the world.
It's probably a little bit of a headwind for the US economy, but I would think of it more as effect rather than cause if you get what I mean.
JULIE HYMAN: Well, on a similar note, it's been interesting this week to see the dollar continue to strengthen.
Even in the face of that downgrade, the action in bonds, what does all of this telling us?
STEPHANIE ROTH: How can we be worried about the dollar losing its reserve status while at the same time the dollar is rallying?
I think this just tells us that investors are still flocking towards the safe haven, which remains to be the US.
So the concern about the US losing that status I think are overblown and investors have been telling us that this week.
In light of a Fitch downgrade, the dollar is still rallying.
This is a medium-term concern.
This might slow out and crowd out discretionary spending over that medium to longer term, but it's not necessarily a concern for the next couple of months.
Fitch downgrading the US doesn't tell us anything we didn't really know.
BRIAN SOZZI: What do you think would take down stocks?
Is there an event or something on the horizon you're looking at for that could lead to a pullback?
STEPHANIE ROTH: I mean, now, expectations are on the more optimistic side.
So it could be any small thing that would rattle investors.
You're starting to get sentiment moving towards that optimistic side.
What that might be?
I think there's a long list of things that potentially could surprise the markets and everybody in the markets are generally really quite complacent at this point.
It could be any negative news that would really scare investors.
JARED BLIKRE: What about market volatility?
Please feel this.
VIX, and if we can go to the Wi-Fi interactive, VIX is elevated from it's pretty low levels.
We had a trading all the way down to a 12,13 handle.
You take a look at the bond market, the ICE BOFA MOVE index, that's finally ticking back up higher.
Does this concern you, especially given the fact that bond volatility has been such a problem for risk markets when it's elevated?
ADITYA BHAVE: Volatility, at least in the VIX, is still pretty low by historical standards.
The move up is probably a function of the downgrade news.
Not hugely surprising.
Again, I mean, if you step back and look at what's happened this year, the move in markets has broadly been very constructive.
I think it's consistent with the strength of the US economy, potentially some good news on AI.
Not a huge concern from my perspective because from a broader lens, it really doesn't look very problematic.
JULIE HYMAN: To end us out here, I want to circle back around to jobs and look ahead.
With the current framework that you have and with your revised forecast, where is unemployment going to peak out during this cycle do you think?
You first and then Steph.
ADITYA BHAVE: We have it in the low 4's, around 4.344.
JULIE HYMAN: So pretty much around where it is-- ADITYA BHAVE: Very benign.
Very benign.
STEPHANIE ROTH: We have about 4 and quarter, so very similar.
We do think that the unemployment rate should rise, that's what the Fed is looking for, they want to see some softening.
But it's very possible we'll get that rebalancing with just a modest rise in the unemployment rate.
JULIE HYMAN: All right, not too much higher than where we are right now.
Thank you guys.
Really appreciate it.
Stephanie Roth, JP Morgan Private Bank Senior Markets Economist and Aditya Bhave, Bank of America Senior US Economist.
Thanks to you both.
Appreciate it.
