Labor market likely softened as Fed hikes take effect

Job growth likely weakened in September as a series of outsized rate hikes swept through the US economy, but slower nonfarm wage growth is still unlikely to deter policymakers from aggressive monetary stimulus to fight inflation, which is at a decade high remains.

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

  • Pay slips outside of agriculture: +260k expected vs +315k in August

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

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

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

If economists’ estimates hold true, projected wage growth would mark the lowest monthly increase since December 2020. Any slowdown in September payrolls would be a welcome sign for Fed officials trying to contain an extraordinarily tight labor market that has put upward pressure on wages and contributed to rising prices.

In any case, Federal Reserve officials have consistently emphasized that monetary tightening will be necessary for an extended period of time before price stability is restored, notwithstanding moderations in the monthly data. The consumer price index (CPI) rose at an annual rate of 8.3% in August, well above the Fed’s inflation target of 2%.

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Federal Reserve Bank of Minneapolis President Neel Kashkari said Thursday that he and his central bank colleagues have more work to do to bring inflation down and are “far from” suspending rate hikes, even like some jobs data this week have shown signs of a slowdown in the labor market.

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

“Thursday’s weekly jobless claims should mean little to Friday’s monthly payroll jobs as survey week is already over, but anecdotal evidence is growing that jobs aren’t as ​​plentiful as they used to be,” wrote FWDBONDS- Chief Economist Christopher Rupkey in a note. “Central bankers’ concerns will not yet shift from inflation to the economy, but the signs are there and the risk of overdoing it is also there.”

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A Challenger report showed that US employers cut 30,000 jobs last month, up 68% from a year ago and 46% from the previous month. Elsewhere, the Labor Department’s Job Openings and Labor Turnover Survey (JOLTS) showed earlier this week that job vacancies fell 1.1 million to 10.1 million on the last workday in August.

“As investors continue to hunt for signs that an elusive Fed pivot is near, a certain type of perverted behavior has unmistakably increased: cheering on weakness,” wrote Anthony Woodside, senior active fixed income strategist at LGIM America, in a Note. “Indeed, market participants have rallied around the idea that weaker economic data could be sufficient evidence to elicit leniency from hawkish policymakers.”

A construction worker drinks water during a heat wave in Boston, Massachusetts, U.S. July 21, 2022. REUTERS/Allison Dinner

A construction worker drinks water during a heat wave in Boston, Massachusetts, U.S. July 21, 2022. REUTERS/Allison Dinner

All in all, expectations are that the data has not yet softened enough. Even if September’s estimated 260,000 job gain materializes, it would be a further slowdown from last month’s 250,000 print, but still significantly higher than the typical pre-pandemic average of 150,000 to 200,000.

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In addition, the labor market reports have continuously surprised on the upside in recent months. August’s print came in at 315k, ahead of the consensus estimate of around 300k. And in a July Shock Jobs Report, the US economy saw 528,000 new jobs, more than double the 250,000 forecast at the time.

Bank of America analysts said in a recent statement that they expect payroll growth to remain strong.

“Indicators of labor market activity, which feed into our forecasts for payrolls, have remained fresh since the August report,” wrote BofA’s Robert F. Ohmes and Molly Baum. “The dynamics on the labor market are proving to be difficult to slow down.

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

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