On-screen text:
Good news is bad?
- July jobs report
- Watchful of wages
- How will Fed react?
Narrator:
Is good economic news going to be bad market news?
So this is a big week for the labor market. Of course, we get the jobs report on Friday morning for July.
Animation: Chart showing direct relationship between S&P 500® and the unemployment rate from 2023 through 2026.
And what's been interesting to watch over the past several years is this idea that as the unemployment rate has generally drifted higher, with the exception, of course, of the past six to seven months, you've seen the S&P 500® actually do better.
It's a little bit of a strange phenomenon when you think about it. The fact that unemployment, as it's been going higher, risk assets have generally been doing better.
But I think one of the reasons for that is because any signs of labor market tightness, meaning the unemployment rate moving lower, potentially putting upward pressure on wage growth, that generally get digested as a negative message for the equity market, in the sense that the Fed maybe has to start tightening and think about hiking rates.
Animation: Chart showing the "Five Fed" (New York, Philadelphia, Richmond, Kansas City and Dallas) services and benefits conditions from 2022-2026. From 2022 through the end of 2024 the chart shows a downward slope and from there it's generally sideways.
That's very much, I think, the case for the report this Friday, because when you look at the fact that now we're starting to get some signs that wage growth might be ticking up, especially when you look at services wage growth reported by the regional Fed banks, and the fact that we are starting to see some upward pressure, not anything extreme, but a little bit of a stabilization in wages.
So when you extrapolate that a little bit out to the broader economy, especially the services sector, which is the largest portion of the U.S. economy, you do get a picture of potential tightness in the labor market showing up again.
And I think, especially in the context of last week's Fed meeting, where there's still a lot of focus from the market in terms of inflation-fighting credibility, that's going to get exacerbated a lot more if we do start to see some signs that the labor market might be tightening.
I still think that we're a little bit far off from that point, but potentially point to some of that wage growth reasserting itself.