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On Friday, all eyes will be on the US non-farm payrolls reading during the first week of a new month. The all-important data will be attentively watched by all market players to see whether the aggressive rate-rising policy of the US central bank is knocking the labour market which has so far proved robust despite recession-linked concerns.
With the next monetary policy announcement on 14 December following the two-day FOMC meeting, and stock markets rallying in recent weeks on an expected Fed’s signals of slower tightening , a strong number could lead to further leg higher.
But, Fed’s Powell has already clarified some clues on the path ahead during his speech at the Brookings Institute on Wednesday. Powell essentially implied that the policymakers would start slowing down its tightening as of the next policy meeting. The stock market logically jumped and the US dollar weakened in response to the more dovish comments. Now the question is whether there will be other options based upon the optimism concerning the awaited NFP data.
November’s NFP is expected to be lighter versus the prior reading. The data has been outperforming expectations lately. The latest BLS report showed that the labour market was still tight, the consensus for what to expect out of NFP has floated up, slightly. One week ago, analysts were forecasting 200K jobs to be added, but that has now moved up to 210K jobs, versus 261K in October.
In the pre-covid months, a 210K jobs report was commonly looked upon as relatively satisfactory. Referring back to the BLS report that came out yesterday, there are some disturbing signals. In October, there were 261K jobs, but the overall market lost 353K jobs. Businesses and companies close down job offers faster than people can be hired. The largest drop in job offers occurred in state governments, followed by manufacturing.
Inevitable Gap
The labour market is still tight because the extraordinarily large gap between job openings and jobseekers after the pandemic still exists. 6.1 million people looked for work last month, but there were 10.3 million jobs only. Despite this gap, wages failed to keep up with inflationary pressures. Current expectations are that average hourly earnings will slow to 0.3% from 0.4% reported in October.
The Bigger Picture
The Fed’s main worry though this cycle has been that higher inflation combined with an extremely tight labour market would lead to a wage-price spiral. However, that hasn’t happened, giving the Fed plenty of space to raise rates to combat inflation. Recently, inflation has been starting to come down, from a combination of higher borrowing costs and worries about an impending recession.
The loss of purchasing power among US staff as their salaries fail to keep up with prices could lead to demand destruction. This could contribute to reducing inflation. Retailers across the United States observed rising inventories and some are suspending buying new inventory for the beginning of 2023, the expectation is that the economy will slow down. Which in turn also contributes to lower inflation.
The unemployment rate is expected to steady at 3.7%, and so is the participation rate. This is reflected in the BLS data showing the number of people leaving jobs to find better wages balanced the number of people being fired under the current tight conditions.
