This week’s quartet of labor market readings underscores ongoing fragility, challenging the Federal Reserve’s policy stance as officials signal a preference to err on the side of caution.
But is the Fed justified in staying cautious?
Here’s a rundown on labor market statistics released last week:
- ADP private payrolls expanded by merely 22,000 in January, about half as much as was expected; The median change in the annual pay was 4.5% for job stayers.
- Challenger. Gray & Christmas’ January report showed that firings surged in January to the highest for the month since 2009. The global executive and outplacement firm stated that U.S. employers cut 108,435 jobs in January, up 118% year over year (YoY) and 205% higher than last month. Hiring for January marked a record low for the month. Transportation witnessed the most firings, followed by the tech sector.
- The Bureau of Labor Statistics’ weekly jobless claims jumped 22,000 week over week to 231,000 in the week ended Jan. 31, marking the biggest increase in almost two months. Continuing claims also jumped to 1.844 million, rebounding from the lowest level in nearly two-and-a-half years.
- The results of the Job Openings and Labor Turnover (JOLTS) survey for December showed job openings falling to 6.5 million in December from 6.928 million in November, belying economists’ expectation for an increase to 7.20 million. In December, the number and rate of total separations were little changed at 5.3 million and 3.3%, respectively.
Fed On ‘Wait-and-Watch’ Mode: After maintaining the Fed funds rate unchanged at 3.50%-3.75% at the January meeting, Chair Jerome Powell remained non-committal about the policy stance going forward but said future decisions would be made “meeting by meeting based on the incoming data and the implications for it and the outlook and the balance of risks.”
The job gains have been low, and the unemployment rate has shown signs of stabilization, according to the Fed’s commentary about the labor market in the post-meeting policy statement released on Jan. 28.
Most Fed speakers, who have made public appearances since the January rate decision, have said incoming economic evidence would determine the policy path going forward. Richmond Federal Reserve Bank President Thomas Barkin said this week he is concerned about shrinking labor supply, potentially due to lower net migration, an aging population, and a declining fertility rate. He sounded uneasy regarding inflation remaining persistently above the central bank’s 2% target.
Implications of Labor Market Softness:
- Near-term positive for stock futures, namely E-mini S&P 500 futures (ES) and Nasdaq 100 futures (NQ), as slowing labor demand and, as an extension, falling wage pressure strengthen the rate-cut narrative. The rise in layoffs, however, could stir worries about a hard landing, in turn limiting any upside.
- The possibility of the Fed cutting rates without stoking inflationary pressures (falling job openings and rising jobless claims point toward reduced labor market tightness) could set off a rally in SOFR (Secured Overnight Financing Rate) futures, Fed fund futures, and Treasury futures. As front-end yields drop faster than long-end yields, a bull steepening will likely ensue.
- In a less restrictive monetary policy environment, the U.S. dollar will likely see weakness against its major counterparts.
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