Two Stories Investors Should Watch More Closely Than the Jobs Report

Normally, on the first Friday of the month, I wait for the jobs report before writing anything. It is, after all, the grandaddy of all data releases. A return to full employment, whatever that means, is the holy grail of central bankers and politicians alike during recoveries from recessions or from shocks to the economy. So, as we seem to have been in a perpetual recovery since 2009, we have become accustomed to paying particular attention to non-farm payrolls and the headline unemployment rate. That is even more true than ever right now, when the jobs data are seen as giving clues as to what the Fed will do and when they will do it.

However, that implied significance actually reduces the significance of the jobs report in market terms, at least if you look beyond an hour or two, so I am focused on a couple of other stories.

Going into the jobs report, my thinking was this: If the employment numbers are good and indicate a robust economy, that would be good for the market on the surface. However, they will also hint at the Fed reducing asset purchases earlier and faster than previously assumed, or even hiking rates before the year is out, thereby reducing stocks’ inherent advantage over bonds. If, on the other hand, they are bad, the opposite is true. They will suggest economic weakness as the delta strain restricts activity, which is bad for the economy, but will also delay Fed action, resulting in more free money for Wall Street traders and investors.

Ultimately, we saw that a spectacularly bad number was released. As cited in the Reuters article about it:

"It's a disaster. It came way under estimates," said Peter Cardillo, chief market economist at Spartan Capital Securities in New York.

We saw a knee-jerk drop in futures and stocks are falling as I write, but I wouldn't be surprised if we saw a quick recovery.

Still, there has been quite a bit of hype leading up to this morning, and I’m sure a lot of readers had been waiting for the numbers. The problem is that while everyone was focused on the jobs report, other news with potentially far more significance is going by unnoticed. The most important and potentially impactful story this week came out of China. Lest we forget, as strong as the recovery here has been, China is still the primary engine of global growth; weakness there will eventually show as weakness in the U.S.

The news that came out on Wednesday, that China’s services sector contracted in August, is significant. We often think of China as purely a manufacturing country, but over half of its GDP now comes from services. One swallow doth not a summer make, of course, but if the contraction in the sector proves to be more than a one-off, it will be truly significant. That situation at least merits watching closely.

Another story with more potential significance to the market than non-farm payrolls came this morning from Walmart (WMT), which announced a dollar per hour pay raise for over half a million hourly paid workers. It is no secret that a lot of companies are struggling to hire people, particularly at the low end of the pay scale. If this forces others to follow suit, as it probably will, then that means that real, lasting inflation in the U.S. is closer this morning than it was yesterday. It is easy for the Fed to say that inflation is transitory when it is only based on supply issues forcing prices of goods higher, but when wages start to climb, it looks much more permanent. That, rather than any jobs report, will impact the Fed’s policy in the next couple of quarters.

While everyone else is focused on the unemployment numbers, don’t lose sight of other news. The data will cause some short-term volatility, as it always does, but recessionary signs in China and the chance of wage inflation in the U.S. have the potential for far more lasting impacts on stock prices. That is what investors should be watching.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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