Non-farm employment significantly revised downward, why is the market "indifferent"?

Overnight, non-farm payrolls were significantly revised down by 818,000, the largest in fifteen years, but the market remained "indifferent" to this revision.

Overnight, U.S. stock indexes closed higher across the board, with the S&P 500 up 0.42% and the Dow up 0.14%. Small-cap stocks and chip stocks rose by over 1%. U.S. bond yields continued to decline, with the two-year yield falling by nearly 11 basis points.

Analysis suggests that the market's muted response may have three reasons: first, the market had already priced in a significant downward revision in non-farm payrolls;

second, the labor market is weak, which only increases the possibility of the Fed actively cutting interest rates;

third, the data covers the period from April 2023 to March 2024, with a lag, and the market is mainly concerned about the weak employment since the second quarter of this year.

Market Has Already Priced In

Brian Albrecht, Chief Economist at the International Center for Law and Economics, said he was not surprised by the market's calm reaction:

Although this is a huge revision, we had already anticipated it in the market, with previous forecasts ranging from 350,000 to 1 million.

As Albrecht pointed out, a previous article stated that Goldman Sachs estimated that the highest downward revision could reach 1 million.

Eric Wallerstein, Chief Market Strategist at Yardeni Research, also agrees with Albrecht's relatively optimistic view. Wallerstein pointed out:

The lack of market reaction is very telling. I think these revisions have already been priced in, and we expected some big revisions, which is a bit of a false alarm.

The negative revision in employment numbers only reduces monthly job growth from 241,000 to 174,000, similar to the average employment growth levels in 2018 and 2019, which the market is not really concerned about.

Prompting the Fed to Cut Rates More Aggressively

Another reason investors may overlook signs of weakness in the labor market is that this weakness may only increase the likelihood of the Fed cutting rates more aggressively in the future.

The Fed raised rates from near zero to a range of 5.25% to 5.5% in March 2022 and maintained it at this level for over a year. But now that inflation is receding, investors have long been pricing in rate cuts.

Wednesday's significant downward revision in non-farm payrolls slightly strengthened this outlook. According to CME Group's FedWatch tool, market traders now estimate a 32.5% chance of a 50 basis point rate cut in September, up from 22.5% on Monday.

Lagging Data

In addition, most experts believe that the recent revisions to employment data will have the smallest impact on the Federal Reserve because these data are so lagging.

Aditya Bhave, an economist at Bank of America, pointed out in a report on Wednesday:

The Fed's concerns about the labor market stem from weak job growth since the second quarter and deteriorating other indicators. It will not be deterred by last year's message of a labor market that was "stable but not strong." The change in investors' expectations for rate cuts is also "minimal."

Wallerstein added that even if employment data worsens, the Fed has the ability to play the hero and save the world. When things go wrong, they usually have a tendency to relax policies. "Fed put options" still exist today.