Stocks Surge Despite Ice-Cold Jobs Report and Growing Stagflation Concerns

Wall Street is surprisingly cheery today even as a notably cold April jobs report fuels concerns of an impending recession and stagflation.

The U.S. economy added just 175,000 jobs in April, well below estimates of 240,000 new nonfarm payrolls. This put the unemployment rate at 3.9%, once again worse than projections of a 3.8% jobless rate.

Average hourly earnings also came in below projections, climbing 0.2% on the month compared to 0.3% expected. All in all, the report is a surprising reversal from March’s shockingly strong jobs reading.

What does this mean for the economy?

Well, a lot.

Jobs have been the Federal Reserve’s major support for its continued restrictive monetary policy. With the labor market proving notably resilient this year — even despite elevated interest rates — the Fed has been granted plenty of leeway to keep rates high as a means of lowering inflation, with little risk of economic blowback.

Today’s report has tightened the Fed’s leash substantially. Indeed, weakening jobs data, in conjunction with the sharp deceleration in first-quarter gross domestic product (GDP) growth, confirms that the economy is slowing down.

April Jobs Report Hints at Rate Cuts to Come

Now, the economy slowing isn’t necessarily a bad thing, at least for Wall Street. A softening labor market and slowing GDP growth will encourage the Fed to speed up its rate-cut schedule. Traders have been foaming at the mouth for lower interest rates practically all year. Any evidence in favor of rate cuts could be seen as a win for an earnings-focused Wall Street.

In fact, stocks are actually up across the board today, even despite the seemingly negative jobs report. The S&P 500 is up about 1% at the time of this writing, while the more rate-sensitive Nasdaq Composite is up about 1.8% on the day. This suggests that Wall Street may actually be more encouraged by the data than one would think at first blush.

“Last week, the GDP growth rate came in at 1.6%, largely missing expectations. We are hopeful that this purposeful slowdown will encourage the Fed to move forward with their plans for two rate cuts this year. Coupled with this slower labor report, the economy appears to be cooling to some extent and encourages the Fed to begin to take action and give consumers a much-needed reprieve,” noted Steve Rick, Chief Economist at TruStage.

Additionally, a softening labor market should help the Fed’s fight with inflation, which has been going in the wrong direction of late.

Jobs Data Hints at Stagflation

Assuming this marks the extent of the interest-rate induced slowdown, the jobs report isn’t necessarily too devastating for the U.S. economy. On the other hand, some analysts are already ringing the alarm bell over a potential stagflation risk in the making.

Stagflation refers to an economic cycle defined by high unemployment, high inflation and low economic growth. It’s a nightmare scenario for a central bank due to the difficulty in dealing with any one symptom of stagflation without exasperating others.

With inflation climbing last month, combined with decelerating economic growth and now rising unemployment, some economists believe the stage is being set for stagflation.

“Weaker than expected GDP and Personal Consumption but higher than expected Core PCE Index and better labor data. That’s a stagflationary mess for folks begging for the Fed put to be activated,” macroeconomist Craig Shapiro told Benzinga after last week’s Q1 GDP reading.

Although, with inflation at 3.5%, unemployment under 4% and GDP growth still positive, it’s likely far too early to jump to any definitive conclusions.

“I don’t see the stag, or the ’flation,” said Fed Chair Jerome Powell, responding to a question about stagflation risks at Wednesday’s policy meeting.

On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.