The dollar slipped through the early part of this week as investors are starting to believe there is weakness in the US labor market. Usually, a slowing jobs market would be a bad sign for the economy. But the unemployment rate has been below structural level for a long time.
More importantly, the Fed has been worried that labour tightness would keep inflation persistently high. A strong jobs market would be seen as making it more likely that the Fed will raise rates again. If job creation starts to slow down, then the Fed will be more comfortable with the thought that it has done enough to bring prices down. That means the rate hike that some officials have strongly hinted at for some time over the next three meetings won’t materialize.
The signs are there
There have already been some indications that the jobs market is weakening. Last month’s figure was below expectations and was just 2K above the lowest figure since the start of the pandemic recovery. Fed Chair Jerome Powell characterized these two months as “good” in terms of Fed policy, which has led a few analysts to suspect that if the August figure is in line with the last two months, then it could confirm no more rate hikes.
Earlier in the week, the JOLTS report showed a significant drop in the number of job openings – well outpacing the number of jobs created. By the end of July, there were 336K fewer jobs available, but only 187K jobs were created. The report was well over 600K fewer than economists had predicted. This was interpreted as a sign that the jobs market is cooling, and that could reduce the upward pressure on wages, the main concern for the Fed.
Keeping things in line
The consensus of expectations for August NFP is 180K jobs created, marginally lower than the 187K reported in July (though it has been pretty much constant for months now that the prior number is revised lower). The unemployment rate is expected to remain unchanged at 3.5%, with an identical participation rate. While those figures are likely the ones to be most discussed by the press, what the market is more likely to focus on is how tight the labor market is. Since that will be pivotal for how eager the Fed will be to bring down costs.
The average hourly earnings figure is expected to remain unchanged at 4.4% annual growth, which is now above the inflation rate. While that might be good for the workers and will be touted by the White House, it makes price stability more challenging. If labor costs are rising at a rate more than doubling the Fed’s inflation target, it would likely keep pressure on the FOMC to keep tightening. A drop in the average hourly earnings figures might end up being more reassuring for the markets than the number of jobs created.
Potential reactions
It’s estimated that around 90K is the replacement rate, while over 200K is seen as creating increased jobs pressure. A result between those levels, therefore, is more likely to reassure markets about the lack of future rate hikes. Below that lower bound, and especially after the JOLTS data, investors might start worrying there is something wrong with the economy. That could lead to a weaker stock market, and a resurgence in the dollar as hesitant investors stick to safe havens.
A result above 200K, on the other hand, would likely suggest the labor market is still hot. Speculation that the Fed will raise again, likely in November, would likely push up bond yields and strengthen the dollar. And investors would also return to worrying that the Fed might push the country over into a recession.
