New claims for jobless benefits have ticked up to nearly a six-month high. Employers have pared job openings to the lowest level since November. Will Friday's jobs report make a trifecta of labor market releases raising hope for a soft landing for the U.S. economy?
For the moment, at least, the Dow Jones is rallying on optimism that aggressive Federal Reserve tightening will go just far enough to tame inflation without tipping the economy into a serious downturn.
Jobs Report Expectations
The Federal Reserve, before it slows its accelerated policy tightening, needs to see convincing evidence that both inflation and inflation pressures are coming down. Inflation pressures are, to a large extent, a function of the labor market, which has driven up wage growth way above the Fed's comfort zone. Low unemployment also is contributing to the highest rent inflation in decades.
Friday's jobs report, out at 8:30 a.m. ET, is expected show the recent pace of job growth (about 400,000 per month) moderated to 270,000.
The unemployment rate is the number to watch. After three months at 3.6%, a move higher might raise the odds of a soft landing, while a move lower will keep the Fed on guard for outsize wage gains. Economists expect another 3.6% reading.
Meanwhile, average hourly wage growth is expected to ease to 5% from a 5.2% annual gain in May.
Job Openings Fall, Jobless Claims Rise
The Fed is trying to dampen demand just enough to get rid of excess job openings, so employers don't find themselves in an unwinnable bidding war for labor. The goal is to lower wage growth, which feeds through to price increases, without causing an employment recession.
U.S. employers were recruiting for 11.25 million job openings at the end of May, down from April's upwardly revised 11.681 million, the Labor Department reported on Wednesday. Yet that's still 5.3 million more than the number of unemployed workers.
By comparison, there were just 7 million job openings in February 2020, just before the pandemic.
The labor market's persistent strength is a key reason why the Federal Reserve is likely to raise its benchmark interest rate 75 basis points later this month — despite increasing signs of economic fragility.
Jobless claims rose to 235,000 in the week through July 2, up from 231,000 the prior week. Claims had fallen to a half-century low of 166,000 in March.
Federal Reserve Tightens Into Slow Patch
The U.S. economy appears to be downshifting quickly. The Atlanta Fed's GDPNow tracker shows that Q2 GDP is on track to fall 1.9%. The big downgrade to growth came after personal consumption turned negative in May on an inflation-adjusted basis, while construction spending fell outright. That data comes on top of the forward-looking new orders component of the Institute for Supply Management's manufacturing survey index turning negative in June.
The Treasury market has abruptly begun to price in a big economic slowdown and perhaps a recession, with the 10-year Treasury yield diving from a cycle high of 3.48% on June 14 to 3.01% on Thursday. The yield curve has inverted, a typical precursor of recession, with the 2-year yield rising to 3.04%.
To top it off, the prices of oil and other commodities have been tumbling, wiping out most of their gains since Russia's Feb. 24 invasion of Ukraine. It remains to be seen how much of that drop will be reflected in the consumer price index for June. The annual CPI inflation rate hit a 40-year-high 8.6% in May. It's not clear whether June's inflation reading will be much lower, but July data should show a meaningful drop in the inflation rate.
Is Dow Jones Set To Rally?
Despite signs that the U.S. economy is decelerating abruptly, CME Group's FedWatch page shows that financial markets are pricing in 96% odds of a 75-basis-point hike on July 27 to a range of 2.25%-2.5%.
Yet the stock market has been rallying this week as Wall Street looks ahead to an inflection point for Fed policy.
CME's FedWatch is indicating that Fed rate hikes will ease to 50 basis points in September and to quarter-point moves in November and December. While markets could be wrong, right now the bet is that the Fed may not hike again after December.
The Dow Jones climbed 1.1% on Thursday afternoon. The S&P 500 rallied 1.6% and the Nasdaq composite 2.4%.
As of Wednesday's close, the Dow was off 15.7% from its record closing high on Jan. 4. The S&P 500 has backtracked 19.8% from its all-time high, and the Nasdaq has lost 29.2%.
A brush with recession appears to be coming much faster than anticipated. That means the Fed won't have to raise rates as high as expected. Yet while a Fed pivot to slower tightening may spark a rally, there's reason for caution. Given that job openings are still elevated and the unemployment rate is near a half-century low, the Fed won't let its guard down quickly.
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