September jobs report: Investors 'shouldn't be that surprised' by market reactions, strategist says

J.P. Morgan’s Chair of Global Research Joyce Chang sits down with Yahoo Finance Live to talk about how markets are digesting September jobs report data, the state of the labor force participation rate, and how the Fed considers this data in its interest rate hikes.

Video Transcript

SEANA SMITH: Stocks falling today on signs that the labor market remains very strong. All three of the major averages on track for their worst days in three weeks. We have the Dow well off just over 600 points.

For more on today's action, what we're seeing more broadly speaking, let's bring in Joyce Chang, JP Morgan's chair of global research. Joyce, it's great to see you. When you're taking a look at today's drop with the Dow off 672 points, S&P and NASDAQ both off pretty substantially, NASDAQ off nearly 4%, does the drop were seeing today make sense to you?

JOYCE CHANG: Well, look, I think this was very clear is that the summer of '75 lives on. The market is looking at 75-basis points again. And the labor market has been front and center of the Fed's efforts to reduce the inflationary pressures on the economy. And the labor market just continues to run stubbornly hot.

So when we take a look at the numbers, we've seen the unemployment rate actually ticking down, reversing August's move up. And that's something that the Fed has to be very concerned about. So I think it's 75-basis points, and we're still not done there.

We're going to see 50-basis points in December, 25-basis points at the beginning of the year until you see a pause. So there's still further to go, and it's not just the US. It's also looking at what's happening in the UK, and in Europe, and in oil markets as well. So I don't think you should be that surprised by what the market reaction was today.

- And continuing a bit of conversation from our prior segment, how can or can the Fed get inflation back to 2% without some massive job losses with a strong labor market like we're seeing?

JOYCE CHANG: Now, look, I think the Fed's going to be looking for three things, like is inflation anchored and do you really see that core inflation is coming down? Because you're going to see this big drop in headline inflation. And then I think it is more softness in the labor markets.

And that's just really what we're not seeing, whether it is looking at the data, like the wage growth numbers that have come out, but also just things like the ratio of job leavers to job losers. That was one of Alan Greenspan's favorite statistics. And that's actually at the highest level that it's been at in 30 years, almost 16%. So I don't think the Fed can think about slowing at this stage in the game given what the labor market dynamics are.

SEANA SMITH: So, Joyce, then what does that mean for Fed policy in terms of what will likely get in November? Do you think a 75-basis point hike is a sure thing? And then what do you think December looks like?

JOYCE CHANG: I think it's 75-basis points. And in November, it's still 50 in December, and in January, February 25-basis points. Really seeing policy rates go to 4 and 1/2%.

And it's not just the US. I mean, I think in the UK, as well just given everything that's been happening there, you're going to see 75-basis points as well. So the summer of '75, as I mentioned, it really lives on here.

- The summer of '75, you mentioned the UK in weakness there. There's been an ongoing debate driven by some comments from the UN earlier in the week. If at some point, the Fed has to consider the impact of their increases on markets around the world, do they start to consider weakness globally at any point?

JOYCE CHANG: Well, I think that, John, the focus is going to be very much on the inflation numbers. And that is really even more so than some of the market conditions something that is a global problem. I mean, look, if you just take a look at emerging markets, I mean, there's 36 countries where you've got food inflation like-- it's above 15%.

So I don't think the focus is going to come off of inflation. Financial market conditions are more volatile. There's also a lot of attention on the strength of the dollar. And what that means, because we've seen that central banks around the world, you know, EM, emerging markets countries, have been drawing down some of those reserves to intervene in the currency. So I think that this discussion is going to continue, but the market conditions, the volatility could be with us for a while.

SEANA SMITH: Joyce, you mentioned the strong dollar here, US dollar index moving to the upside once again today closing in on 113. I guess, how big of a headwind do you see the strong dollar being, not only in the fourth quarter for corporate earnings, but looking ahead into 2023?

JOYCE CHANG: You know, the strong dollar is going to have a lagged effect here. And we're also looking at lower US growth. I mean, we have US growth next year sub 1%. And we've also seen this really big drop in global consumer confidence.

I mean, if you take a look at global consumer confidence right now, it's about 2.8 standard deviations lower than it was in the June 2021 peak period. So that combination of slower growth, stronger dollar, a decline in household savings, a deterioration of consumer sentiment, all of that means that earnings are probably here going to have to be revised. And the dollar, that really does come out with more of a lag.

- So given all those conditions that you're stating strategically, how do you position yourself?

JOYCE CHANG: Well, look, I think-- I still think one market, and it's one that I've talked about here before is still the energy market. I mean, we do think that oil is going to retest $100 here. And some of this is looking at things like not just OPEC policy, but also that the US Strategic Petroleum Reserve Fund. That also concludes with what they have been releasing at the end of October.

You also have that with the oil price cap. Russia has been threatening some form of retaliation as well. So I still think that when you look at the commodity complex, agricultural commodities, we think could be up 10% to 20% next year.

- Had a little bit of an audio issue there. There, she's back. JP Morgan, Chair of Global Research Joyce Chang, appreciate you being here. Have a great weekend.