In what is commonly known as their dual mandate, the Federal Reserve is charged by Congress to effectively promote both maximum employment and stable prices in the U.S. economy.
Jobs > Inflation
Cooling of the Labor Market
As we celebrate Labor Day this weekend, we thought it appropriate to look at the current employment situation in the United States. The job market has been surprisingly robust since the elevated unemployment due to the COVID-19 pandemic and economic shutdown.
Higher for Longer
That a notable Silicon Valley bank failure could overshadow significant developments in the labor market is a testament to how attuned investors remain to the unpredictable consequences of the Fed’s ongoing campaign to raise interest rates.
Summer of '69
While we continue to see a daily deluge of headlines highlighting layoffs in the tech space, the rest of U.S. labor market appears fairly resilient. This morning, the Department of Labor released the monthly jobs report and what was quite unexpected was the gain of over 500,000 new jobs. This brought the unemployment rate down to 3.4%, the lowest since May of 1969.
Turning the Page
After being caught flat-footed by inflation last year, the Federal Reserve maintains a steely resolve to ensure that the beginnings of slowing inflation witnessed last fall continue in 2023. Following the stock market’s worst year since 2008 and the worst year ever for bonds, investors are hoping for better days in 2023.
The Bear Market Bounce
Last Friday, the market closed out the day, week, month and quarter all with negative returns. Fears of higher inflation, more tightening by the Federal Reserve and potentially lower corporate earnings weighed on investors’ minds. The S&P 500 broke below the June low last week, extending the bear market that began in January. At 269 days as of quarter end, this is the most protracted correction since the March 2009 low. Surprisingly, the market decided to pull a 180 early this week, returning almost 6% on Monday and Tuesday. So, what was the deal?
Laboring Along
Federal Reserve Chair Jerome Powell’s speech at last month’s Jackson Hole Economic Symposium focused market participants on the labor market ‘speedometer’ that will determine how much and for how long our central bank will maintain its current stimulus measures. The Fed has set a high bar for achieving ‘substantial further progress’ towards full employment.
Signs!
“Signs, Signs everywhere there are [help wanted] Signs,” is how the song goes. It’s the first Friday of the month, and that means the monthly payroll report is released by the Bureau of Labor & Statistics.
Waiting is the Hardest Part
by Shawn Narancich, CFAExecutive Vice President of Research
Seeing the Forest through the Trees
The nexus of anxiety surrounding China and its slowing rate of growth eased this week as both the Red Giant and its neighbor Japan signaled tax cuts and infrastructure spending, the kind of expansionary fiscal policy many market watchers have been anticipating. Chinese leaders have been vocal in attempting to reassure markets about their economy but the latest evidence of declining exports and imports reported earlier this week continues to point to an economy struggling to make the transition away from investment-led growth. Though slower growth in China and recessions in Brazil and Russia are dampening the earnings of U.S. multinational companies operating in these countries, we see nothing more systematic in the latest stock market correction. As they say, this too shall pass.
All Over but the Yellen
All of which brings us to next week’s Federal Reserve meetings, at which time FOMC policymakers will convene to decide whether the U.S. central bank will finally lift short-term interest rates, which have been targeted to zero percent for nearly seven years. Arguably, the Fed has achieved its employment objective as measured by an unemployment rate approaching 5 percent and a job base that has joined GDP in record territory. What hasn’t been achieved is the Fed’s price objective of 2 percent inflation, and though Chairwoman Janet Yellen has signaled her belief that low oil prices and the inflation dampening effect of a strong dollar are transitory, some pundits question the sagacity of moving on rates with inflation so far from the target.
Will Tighter Labor Markets Hold Sway?
We agree with Yellen’s view on both points – our belief is that oil prices have bottomed and will rise from here, and that the best gains of the trade-weighted dollar have already been achieved. What’s driving Fed hawks to be pro-active in raising rates ahead of any visible inflation is the labor market which, according to this week’s Job Openings and Labor Turnover Survey (JOLTS), now sports the highest level of unfilled jobs in 15 years. High demand for jobs relative to the supply of labor could draw disaffected workers off the sidelines but tighter labor markets might also begin to force employers to raise wages and salaries to attract and retain talent. So while investors have yet to see the evidence of a tightening labor market in key statistics, like wage growth and rising unit labor costs, we would argue that the Fed is best served to be anticipatory in setting monetary policy.
Our Takeaways from the Week
- Equities remain volatile as investors grapple with a slowing Chinese economy and uncertainty about Fed rate hikes
- We believe the U.S. economy is healthy enough for the Fed to achieve lift-off from zero interest rate policy