Labor market likely softened as Fed hikes take effect

Labor market likely softened as Fed hikes take effect

Job growth likely softened in September as a series of supersized interest rate hikes permeated the US economy, but a softer non-farm payroll gain is still unlikely to deter policymakers from aggressive monetary action to fight inflation that remains at a decades-high.

The Labor Department is set to release its latest monthly jobs report at 8:30 am ET on Friday. Here are Wall Street’s expectations for the report, according to Bloomberg data:

  • Non-farm payrolls: +260,000 expected vs. +315,000 in August

  • Unemployment rate: 3.7% expected vs. 3.7% in August

  • Average hourly earnings, month-over-month: +0.3% expected vs. +0.3% in August

  • Average hourly earnings, year-over-year: +5.0% expected vs. +5.2% in August

If economist estimates are realized, the projected payroll gain would mark the lowest monthly increase since December 2020. Any cool-off in September employment data would be a welcome sign for Fed officials trying to tamp down an extraordinarily tight labor market that has placed upward pressure on wages and contributed to soaring prices.

In any case, members of the Federal Reserve have consistently asserted that restrictive policy will be necessary for a sustained period of time until price stability is restored, regardless of moderations in month-to-month data. The Consumer Price Index (CPI) in August rose at an annual rate of 8.3%, well above the Fed’s inflation target of 2%.

Minneapolis Federal Reserve Bank President Neel Kashkari said on Thursday that he and his central bank colleagues have further work to do to bring inflation down and are “quite a ways away” from pausing on raising interest rates, even as some employment data this week has shown signs of a cooling labor market.

On Thursday, data from the Labor Department reflected a spike in the number of Americans filing for first-time unemployment insurance. Initial jobless claims rose sharply to 219,000 for the week ended Oct. 1 after sliding to a five-month low of 193,000.

“Thursday’s weekly jobless claims should mean little for Friday’s monthly payroll jobs with the survey week already past, but the anecdotal signs are getting more noticeable that jobs aren’t as plentiful as they were,” FWDBONDS Chief Economist Christopher Rupkey wrote in a note. “The worry of central bankers won’t be shifting from inflation to the economy yet, but the signs are there and the danger of overdoing it is as well.”

A report from Challenger showed US employers slashed 30.00 jobs last month, up 68% from last year and 46% from the prior month. Elsewhere, the Labor Department’s Job Openings and Labor Turnover Survey (JOLTS) earlier this week showed vacancies dropped 1.1 million to 10.1 million on the last business day of August.

“As investors continue to look for clues that an elusive Fed pivot is near, there has been an unmistakable rise in a particular type of perverse behavior: cheering for weakness,” Anthony Woodside, senior active fixed income strategist at LGIM America, wrote in a note. “Indeed, market participants have coalesced behind the idea that softer economic prints may be sufficient evidence to achieve clemency from hawkish policymakers.”

A construction worker drinks water, during a heatwave in Boston, Massachusetts, US July 21, 2022. REUTERS/Allison Dinner

All that said, expectations are that the data has not yet softened enough. Even if the estimated gain of 260,000 jobs in September materializes, it would be another cooldown from last month’s print of 250,000 but still substantially higher than the 150,000-200,000 average that was typical before the pandemic.

Moreover, jobs reports have continuously surprised to the upside in recent months. August’s print came in at 315,000, higher than the consensus estimate of around 300,000. And in a shock jobs report in July saw the US economy add 528,000 payrolls, more than double the respective forecast of 250,000 in the time.

Bank of America analysts said in a recent note they expect strong payroll growth to continue.

“Indicators of labor market activity that feed into our projections for payrolls remained red hot since the August report,” a BofA’s Robert F. Ohmes and Molly Baum wrote. “The momentum in the labor market is proving to be difficult to slowdown.

Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc

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