It might be an exaggeration to call the Federal Reserve sadistic – or it might not be, as the central bank wants to see it get harder, not easier, to get a job in the U.S. The probability of an imminent interest rate hike just grew as a key job openings gauge pointed to a resilient labor market.
Evidently, good news is bad news again as the latest JOLTs (Job Opening and Labor Turnover Survey) report indicated that jobs are available to people who are willing and able to get them. Specifically, there were 10.1 million job openings at the end of April, compared to 9.8 million job openings reported in March.
Not only did the April result demonstrate month-over-month growth in the number of job openings, but it also beat economists consensus call for 9.4 million openings. Consequently, whereas the markets had priced in a 60% probability of a June interest rate hike prior to the JOLTs report, that figure jumped to 71% after the release of the JOLTs report.
Economists with Oxford Economics acknowledged that there are “some concerns over the veracity of the JOLTS survey due to historically low response rates.” Nevertheless, they drew the conclusion that “labor market strength remains robust.”
This news item isn’t on the front page in the financial press because people are still wringing their hands over the debt ceiling debate on Capitol Hill. Inflation isn’t the buzzword that it used to be, as Google searches for “inflation” are down 50% from their August 2022 peak.
Yet, the Fed definitely hasn’t stopped tracking inflation, including the employment numbers that will affect inflation. As long as people are working, they’ll have discretionary income to spend and when products and services are in demand, their prices tend to stay high.
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Or at least, that’s what the central bankers are thinking when they see positive news in the jobs market. Speaking of which, Friday will be crucial as the May jobs report is due to be released. Economists anticipate that 195,000 nonfarm payroll jobs were added in May (versus 253,000 in April), and they believe that the U.S. unemployment will increase slightly to 3.5% (versus 3.4% in April).
Economists with Citi actually went so far as to draw a line in the sand, predicting that a May nonfarm payrolls number of 200,000 or greater would probably prompt the Fed to raise interest rates in June. So again, the nation’s central bank views labor market resilience as a bad thing that needs to be fixed.
Courtesy: Bloomberg, @Barchart
This notion contravenes the stance of the European Central Bank (ECB), which issued a warning that interest rate hikes are putting financial market stability at risk. It’s highly unlikely that the ECB’s warning will deter the Fed from its slash-and-burn approach to tamping down inflation.
Already, there are signs that the Fed isn’t backing down irrespective of the consequences. Richmond Fed President Thomas Barkin reportedly said he’s looking for signs that demand is cooling to be convinced that inflation will ease, while Cleveland Fed President Loretta Mester sees no “compelling reason” to pause interest rate increases amid the debt-limit deal.
The stock and bond markets responded fearfully to the JOLTs report, but as always, remaining calm is the right reaction when central bank policy errors loom large. There are pockets of value to be found in the financial markets, and remember to take a look at tangible assets if large-cap stocks aren’t offering anything promising now.
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