Markets: The Payrolls Test

The reaction to today's strong payrolls report will say a lot about just how bullish the market really is. Both the stock and bond markets have been a little Alice-in-Wonderland of late, rising on bad news in the expectation, we're told, that more bad news means more rate cuts in the future. Now, however, it looks much more likely that we're stuck at 4.75%.

In the grand scheme of things, this is good news. It means less chance of a recession and less chance of inflation. It means that the economy is robust enough to weather housing-sector weakness, especially with a weak dollar starting to feed through into export figures. But it also means that Wall Street can't just sit back and wait for its free lunch rate cuts: real businessmen in the real economy have to actually go out and work for their profits. If the reaction to the payrolls report is particularly bearish, then that might be a sign of the markets coming round to reality.

One other point is worth making, however: the monthly payrolls report, for all that it's the most important economic data release for the markets, is in reality increasingly meaningless. The Fed won't hold off easing on the strength of this one report alone, and neither the market nor economists should read too much into it, especially when so much of the labor-force growth might have come from quirks surrounding employment dates in the public-sector school system.