This is The Takeaway from today’s Morning Brief, which you can sign up to receive in your inbox every morning along with:
It’s a market cliche that a “Goldilocks” economy is good for stocks. Over the past 18 months an economy regularly defying pessimistic expectations swept away any prognosticators worried it would be “too cold.”
And investors are now looking again for that proverbial economic Goldilocks, that sweet spot where inflation has finally started to cool but the labor market isn’t collapsing.
But it’s getting tougher to find after last month’s jobs report missed forecasts. Wednesday’s JOLTS data, which showed the lowest number of job openings since 2021, only cooled the porridge further. And investors are now bracing themselves for Friday’s employment numbers.
The JOLTS report prompted an uptick in Fed fund futures pricing in a half-percentage-point rate cut at the Federal Reserve’s meeting this month. Between the anticipation of monetary stimulus and the fact that stocks tumbled on Tuesday, the equity reaction was muted.
Investors would love lower rates. But they need to be careful what they wish for. A half-point rate cut as a result of a more abruptly weakening job market should give them pause.
A 50 basis point reduction “would send the wrong signal to the market — indicating the Fed is more worried about recession than inflation,” David Sekera, Morningstar chief US market strategist, said in a note to Yahoo Finance. “In that case stocks could sell off more.” (Check out our interview with David here.)
In other words, a 50 basis point cut would be like the pilot hitting the oxygen masks deployment button — not exactly the recipe for a “soft landing.”
Others are nervous too. Citi chief US economist Andrew Hollenhorst implied that the market is in denial about labor market weakness, just as it was about “transitory” inflation.
“Every month there was a new story for why you shouldn’t take it seriously,” he told Yahoo Finance in an interview. “This feels a lot like that because the unemployment rate didn’t just move up in July: It’s been moving up for the better part of six months or longer now. And it’s been consistently moving up in each of the last four employment reports. So wherever the number comes out on Friday in any given month … we still have a range of data that tell us that this is a labor market that’s weakening.”
That soft landing, Goldilocks equilibrium thing we’re in might be a mirage before something more sinister. But on the other hand, moderating inflation grants the Fed new arrows in its quiver as it turns to the other half of its mandate. And good thing too.
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