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Jobless Claims Move (Slowly) the "Right" Direction

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Thursday, October 6, 2022

New and continuing jobless claims, as nearly every Thursday, are out this morning, providing yet another gauge for the labor market in real time. This not only depicts domestic employment health overall, but also provides additional insights into future Fed moves regarding interest rates.

The headline figure of 219K Initial Jobless Claims last week was more than 15K higher than anticipated and +29K from the previous week’s downwardly revised +190K (which was the lowest weekly read since late April). Continuing Claims, reported a week in arrears from new claims, arrived at 1.361 million — notably above the 1.346 million reported the previous week, though still at a low point historically.

Pre-market traders like these numbers, even as they demonstrate slight weakness in employment overall, as a soft labor market works toward the Fed taking a more dovish tone on interest rate hikes. Futures swung from modestly negative to modestly positive on the S&P 500 and Nasdaq on this morning’s news, while the Dow cut its pre-market losses in half at this hour to -32 points. Weakening jobs numbers, even when you need a microscope to see them, are a sign that the Fed is closer to the top of interest rates.

Since the most recent Fed meeting, the main wall of worry market participants have found themselves trying to climb is that inflation is currently rolling over while the Fed is relying on backward-looking data to make its decisions about interest rate tightening. So one sure-fire way to alleviate this trepidation is to see monthly/weekly/quarterly inflation numbers melt down in the direction of 2% (still the Fed’s “optimum” level) — and unemployment to rise, removing wage growth initiatives from the labor market. Thus, the Fed will see their plan is working and can go about the business of rounding out the Fed funds rate.

Eventually, investors believe, the Fed will get around to loosening interest rate levels again, but that’s not really something worth wishing for: if the Fed suddenly pivots and sends rates lower, it likely means their policy has already done meaningful damage to the economy at large. Everybody already knows this “damage” means an economic recession, which many analysts already feel is unavoidable — the question is how deep and how long-lasting a recession are we talking about?

In the case of jobs numbers, tomorrow’s non-farm payroll report from the U.S. Bureau of Labor Statistics (BLS) is the Big Kahuna. Expectations are for 275K new jobs created in the month of September, down somewhat from the 315K reported for August, with the Unemployment Rate steady at 3.7%. These are all historically robust numbers in and of themselves, but at least they are moving in the right direction. The 12-month average in monthly jobs gains over the past year is 487K, but only 381K in the past six months.

That said, more than a quarter million jobs filled per month is nothing to shake a stick at. And in terms of the Fed pivoting on interest rate levels, the most recent quote relative to this comes from Atlanta Fed President Raphael Bostic, who stated “it’s important to resist reversing policy prematurely” — meaning even when policies are showing signs of working, that’s not a reason in and of itself to reverse course.

All this is to say: expect another 75 basis-point rate hike November 2nd (the next Fed meeting); these jobs numbers do not change this.

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