One thing is absolutely certain – the Fed will not be taking its foot off the gas. Jerome Powell will opt for an unprecedented fourth 75 bps hike during the November meeting.
At the heart of the matter is the unemployment rate, which fell back to its pre-pandemic low of 3.5%, versus expectations that it would stay flat at 3.7%.
The tightening in the labour market came despite the slowdown in global growth, a steep decline in openings in the JOLTs report (which I wrote about earlier in the week and can be found here) and a rise in applications for unemployment benefits.
Sam Bullard, senior economist at Wells Fargo was quoted as saying,
There’s no evidence to suggest the Fed should reduce the pace of rate hikes.
Nonfarm payroll jobs rose by 263,000 during the month, reaching a 17-month low.
This was significantly slower than the 315,000 in August but within expectations of approximately 250,000 to 275,000.
During the past year, the monthly average has been at 512,000, but today’s numbers are still robust compared to the pre-pandemic average of 200,000.
Source: US BLS (‘000)
Notably, job gains were highest in the leisure and hospitality sectors (83,000) and healthcare (60,000). Earlier in the week, the healthcare sector had seen the sharpest fall in openings.
Even total unemployment was down to 5.8 million from 6.0 million in the month prior.
However, labour participation (i.e. the rate of people in the working-age population, that are looking for work, divided by the total civilian working-age population) remains anaemic, slipping to 62.3% from 62.4% in August.
Source: US BLS
This is primarily driven by ageing demographics, the surge in retirees over the last two years and the added personal costs of caring for family members in a health crisis. This combination of factors encouraged sections of the population to exit the labour force altogether.
Another key number to watch was the average hourly earnings of private nonfarm payrolls. Although preliminary, this data showed a rise of 10 cents an hour or 0.3% month-on-month (to $32.46) and was higher by 5% compared to last year.
Despite being lower than market expectations of 5.1% and slowing from August which came in at 5.2%, this measure crystalized the Fed’s aggressive future pathway.
Similarly, for private-sector production and nonsupervisory employees wages also increased by 10 cents (to $27.77), or 0.4% since August.
Source: US BLS
Unsurprisingly, expectations of a rate hike of 75bps surged higher with the CME FedWatch Tool rising to 84.3% at the time of writing, from 75.1% just a day earlier.
Moreover, stock markets which had jumped with cautious glee earlier in the week as job openings fell by over a million, found their hopes of a pivot dashed and are now well in the red.
Despite fears of a rate-hike-induced recession, the job market has not downshifted remotely enough to change the Fed’s mind on inflationary pressures.
Crucially, the JOLTs reported a decline in jobs per unemployed worker in August from 2 to 1.7.
If the Fed’s hawkishness is to be taken at face value, with inflation stubbornly high and plenty of jobs still to be had, we should brace for plenty of additional tightening.
Market reports suggest that at the end of 2022, the Fed’s fund rate will likely reach 4.25% – 4.5%, while further tightening is to be expected in 2023.
The Fed has claimed that it expects unemployment to rise to 4.4% by the end of 2023, which would equate to about a million job losses unless labour participation is not dramatically altered.
As expected, the 2-year treasury rose to 4.325% at the time of writing, up 63 bps on the day.
Covid’s long shadow
The WSJ’s Jeffrey Sparshott noted,
(research shows) that an estimated two million people were out of work because they were either sick with Covid or caring for someone who was.
If accurate, the deep mismatch in the supply and demand of labour may be caused at least partly by vacancies being unfilled due to an unhealthy workforce.
Mike “Mish” Shedlock, well known economic blogger at MishTalk thinks that the Fed is underplaying its estimate of the coming unemployment.
However, he qualifies this by arguing that if the job market has not completely recovered since the covid outbreak and the recessionary shock is not inordinately large,
…it stands to figure the rise in the unemployment rate will be below average.
Perhaps the decimation of the labour market during the worst of the covid outbreak may prevent a much bigger collapse in jobs than is currently anticipated by the Fed today.
To accommodate the ongoing impact of covid, the BLS will be including four fresh questions on teleworking in its next household survey.
The next report will be available on 4th November 2022. However, the survey will be temporarily discontinued to accommodate the additional data collection and processing required.
In commodities news, at the time of writing, WTI crude was trading 4.5% higher at $92.4 per barrel, while gold was down 0.5% at $1,710.1.
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