Why the world’s most important economic data release has unnerved markets

US employment data came in weaker than expected on Friday.

In recent times, that's been good news for markets. Weaker jobs data means looser monetary policy.

But this time round, the traditional trade didn't pay off.

What's changed?

The US jobs data was worse than expected – and markets didn't like it

Once a month, every month, the market's collective eye turns towards the US nonfarm payrolls figures.

It's the most important data release on the US labour market. As we've noted here before, it may be the most important economic data release in the entire world.

Why? The US is still the world's most important economy. What contributes most to its economic growth? Consumption. So the vitality of the US consumer is the most important component of US economy growth.

And if there's one thing that matters more than any other in terms of underpinning propensity to consume, it's job security.

So a gainfully employed US consumer is good news for the global economy, and an underemployed one is bad news.

That's why everyone pays so much attention to the figures.

Now whether it makes sense that they can move markets on an instantaneous basis when they're released is a little bit more of an open question. The jobless figures are revised regularly.

You can get a shocker of a report (either very high or very low) and you'll get a big market reaction on the day. And yet when you find a month or two or three later that it was all a miscalculation, the market doesn't tend to react, even although the new data is presumably a better reflection of things than the flawed data.

You can rationalise all of this, by the way. It makes sense for markets to react to fresh data even if it's not perfect, because it's all they've got. But let's not go into esoteric theory for now. Let's just accept that markets are noisy things and not always entirely rational.

Anyway, the latest figures came out on Friday, and they weren't very good. Prognosticators had been betting on around 500,000 people being added to payrolls in September. The number came in at just 194,000, the weakest reading this year.

Not only that, but people dropped out of the workforce (not what employers want to see given that they're struggling to hire) while wages rose at their strongest rate since April.

Now there are times when you'd have expected markets to like this. Why? Because while strong jobs reports are good for the economy, it also implies that interest rates might have to rise. All else being equal, markets aren't fond of higher interest rates.

In recent years (in fact, for practically the past decade), a disappointing jobs figure has been welcomed by markets, because it meant that monetary policy would stay lower for longer.

And at first, that's how investors took it on Friday. When the data came out, the Nasdaq spiked higher, as did gold. Yet they both ended the day lower - the Nasdaq particularly so.

So why the change of heart?

The investment environment will change either way

The problem for markets today is that the Federal Reserve seems keen to at least start "tapering" (that is, reducing the rate at which it is printing money), and this jobs report isn't weak enough to justify holding off.

Worse still, inflationary pressure remains strong. That's really bad news as far as markets are concerned.

Rising inflation driven by a stronger economy might mean higher interest rates, but it should also mean better corporate revenues and profits. Costs (raw materials prices and wages) might rise for companies but productivity gains and increased sales might offset this.

But if you get both inflation and a weaker economy, also known as stagflation, that's the worst of all worlds. The world's central banks will struggle to deal with that problem, because it's theoretically not meant to happen.

Of course this is one jobs report. As we noted earlier, they get revised regularly. And while the Fed might want to taper, that doesn't mean it'll be raising interest rates any time soon (though central banks across the rest of the world are talking a lot tougher than they were).

However, it does all leave markets between a bit of a rock and a hard place. Either things go right, and we end up with a stronger economy and higher rates and higher-than-in-the-past inflation, or things go wrong, and we end up with a stagnant economy, but one that still struggles with inflation.

Either way, that's a very different environment to the "always teetering on the edge of deflation" world we've been living in for at least a decade now. Which in turn implies that your investment portfolio will need to look different too.

We'll be discussing this in a lot more detail at this year's MoneyWeek Wealth Summit next month. We're currently finalising the line-up and I can guarantee you won't want to miss it. The early bird deadline is fast approaching so make sure you get your ticket now!

Until tomorrow,

John Stepek

Executive editor, MoneyWeek