Investors await explanations from the Fed after employment data
Alexander Ovchinnikov
Oct 4, 2024The labor market remains strong, inflation is not defeated. The Fed will clearly have to justify itself. But the losses of investors who believed in Powell's forward guidance reduce confidence in his policy.
It was a week of labor market data. And since the Fed has prioritized maintaining its stability (and it is for this reason, as it claims, that it cut the rate by 50 basis points), market participants are now fully focused on employment.
But in the middle of the week a report was published on job openings, which turned out to be quite strong: it showed an increase in open vacancies to 8.04 million compared to 7.71 million a month earlier and expectations at the level of 7.69 million (the layoff rate remained low). Despite the fact that the report reflected data for August, investors became cautious, and the yield on long-term treasury bonds rose from 3.73–3.75 to 3.80%.
Key and more timely data were published today. They answered the question of how many new jobs were created in the economy in September and whether the labor market requires such serious attention from the Fed that the rate was cut by 50 basis points two weeks ago.
It turned out that the labor market is fine. Firstly, the data for July and August were revised upwards (July: from 89 thousand to 144 thousand, August: from 142 thousand to 159 thousand). Secondly, in August, the number of new jobs increased by 254 thousand, of which 233 thousand were in the private sector, which is a significant indicator in itself, and thirdly, this is the maximum increase since March of this year (232 thousand). The private sector could only boast such hiring rates in April-May 2023.
The second most important point: the growth rate of hourly wages. They increased by 0.37% m/m compared to 0.46% in August. But this is a very strong increase in itself. Moreover, on an annual basis, the rates accelerated to 3.97% compared to 3.89% y/y in August. This is a return to the growth rates of May.
The last from the report: the unemployment rate decreased to 4.1% compared to 4.2% in August and 4.3% in July, and the employment rate increased from 60 to 60.2%.
Therefore, returning to the basic questions of Fed policy, it can be noted: in reality, both the labor market remains fine, and inflation does not seem defeated. Then the question is: why was the rate cut by 50 basis points, which usually happens during periods of clear economic threats or financial shocks?
Why know this
There are two conclusions here. Firstly, it is quite possible that the yield on long-term bonds will rise above 4.0% next week. And secondly, having believed in the seriousness of the Fed's forecasts (although the statistics did not indicate threats to the economy or market stability) and expecting further yield declines in the market, investors are now waiting for explanations from Powell. The only problem is that confidence in his policy has been seriously shaken.
