The Fed Is Data Dependent—But What If There’s No Data?

Investors ignore shutdown noise—but they can’t ignore missing jobs and inflation data.

KEY TAKEAWAYS

• The shutdown itself is not the market’s problem–missing data is

• The BLS jobs report wasn’t released, leaving the Fed without its key labor market input

• ADP’s private payroll report showed a sharp miss, -32k vs +51k expected

• The Fed says it is “data dependent,” but no data complicates its next move

• Markets fear uncertainty more than weak data

MY HOT TAKES

• Markets don’t actually care about shutdown noise–they care about losing visibility

• The ADP report is a substitute, but not a perfect one, and it’s flashing red

• The Fed is trapped: inflation still above target, labor softening, and now missing data

• The shutdown exposes how fragile policymaking is when dependent on laggy, flawed stats

• This could turn into a volatility event if CPI is also blocked

• You can quote me: “Investors can handle bad news. They can handle good news. What they can’t handle is no news.”

Down, but not out. Have you heard that the Government is shut down? I know you have. If you read my reports from earlier in the week, you know that while there may be some economic impact if the shutdown drags on, the long-term market impact may be negligible. You can read about the details here. If you are tired of reading, just watch my interview on Yahoo Finance Live where veteran journalist Julie Hyman asks me about the shutdown from earlier this week–check that out here. Ok, so we got that out of the way, and actually, based on how the market has behaved since the shutdown, it is clear that investors, at least, are looking past the shutdown as a Washington problem and not a market problem.

But there is something else we have to think about, which some, but very few are discussing. Data! Important economic data that is not going to be released in many cases. Specifically, today’s long-awaited monthly Employment Situation from the embattled–and still headless– Bureau of Labor Statistics (BLS). This is the official employment data that the Fed relies on to make policy decisions.

Now we know all of the BLS report’s shortcomings. Specifically, how it is just a projection based on a small sample and how it is reconciled with the real numbers once a year. It’s true and I have written about the specifics. There are lots of questions about exactly how the agency comes up with one of the most influential monthly economic releases. Whether those questions are legitimate or not, is less important than the fact that the public may have lost a bit of faith in the results. Again, all that aside, the Fed still relies on those monthly numbers as a first line of analysis on the state of the US labor market. The very same Fed whose hands ply the levers of the US Economy. The very same Fed that is tasked with full employment! The very same Fed that seems to have just recognized that the nation’s employment situation may be losing some steam. The Fed’s last policy move–a -25 basis-point rate cut–was based on it. Given still above-target inflation, we cannot expect the Fed to continue cutting rates in the near-term unless weakness in the labor market continues to play out.

Fed folks say it over and over: “we are data dependent!” That means less cuts if we get positive employment prints or hot inflation results, or, depending on your disposition, more cuts if the labor market continues to crumble. Because the Fed is data dependent, so must we be, if we are hoping for those 2 more expected rate cuts this year. Futures predict a 100% chance of 1 and an 87% chance of a second cut before year end.

The Fed’s next FOMC decision will be on 10/29, later this month. That means its last bit of monthly employment data would be today’s expected monthly employment situation data dump. Except, in case you hadn’t heard, we will not likely be in receipt of said. Why? Because of the shutdown. Now what?

Well, in case you hadn’t noticed we also get a monthly number from ADP, which just happens to be released a few days prior to the BLS report. My long-time followers surely know about this. If you look at these numbers every month, you will notice that they diverge from the BLS numbers, which is why they are typically not market movers. The ADP report only covers non-government private jobs, and its methodology is different from BLS’s. The ADP report typically serves as a data point for most traders who are happy to wait a few extra days to get the “official” government release. But absent of the latter, we are left with the former to inform us.

On Wednesday, the ADP Employment Change number came in at -32k and economists were expecting 51k. So, according to the report there were net job losses last month in the private sector… er, ADP’s clients’ 26 million employed. That’s a painful miss, and that miss is made worse by a downward revision from last month’s 54k to -3k. That is like bad and bad. Fed Funds Futures took notice and upped the probability for a later-in-the-month cut–nothing drastic.

Still, that leaves us wondering what today’s BLS report might say. You know, the one that is sitting on some desk somewhere in the Suitland Federal Center (BLS HQ) with no one to release it. We know–based on history AND methodology that we can’t just guess what the actual number might be but have a look at the following chart then follow me to the close. 

This chart shows ADP monthly employment change (white line) and BLS Nonfarm Payrolls monthly change (green line). Now, we know, based on history, that we can’t really know what today’s BLS print might actually be, but it should be clear, based on this chart, that the trend, according to both readings, is decidedly… well, weak. Since May, the BLS Nonfarm Payrolls prints have been 19k, -13k, 79k, and 22k, and the rule of thumb is that prints under 100k are considered weak. Economists were expecting this morning’s print to be another weak 55k showing. So, I think that it is fair to assume that the number may not have been the same as ADP’s and may not have been the 55k economists were expecting, but whatever it was, it would have been not good.

Looking forward to this month’s FOMC meeting, the Fed will have to rely on other sources to formulate its strategy. If the shutdown continues, there is a chance that it may have to find “other” sources for the Consumer Price Index / CPI report that is due out on the 15th which is also a BLS release. In these cases, my friends, it's not weak data itself that may cause stocks to move, but rather, a lack of it.

YESTERDAY’S MARKETS

Markets gained yesterday in a bouncy, low-volume session as traders chose to continue to brush off the shutdown drama. No weekly employment data yesterday and no monthly today, meant that traders could continue to hold high hopes of future Fed cuts–they like that.

NEXT UP

• No official government data today, but the Senate is expected to vote on a CR once again later today, though it is not expected to pass.

• ISM Services Index (September) may have slipped to 51.7 from 52.0.

• Next week we get FOMC meeting minutes, University of Michigan Sentiment, some early risers’ earnings announcements, and more drama from DC. Check back in on Monday to ensure that you are ready for action.

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