Thoughts From Last Week 12-5-2022

Damon Walker, AIF | December 05, 2022

A message from Edge Investment Solution's Damon Walker:

Thoughts From Last Week

Source: BLS, J.P. Morgan Asset Management.

Investors will be looking for more "bad news" on the labor market (especially wages) to gain conviction that inflation is cooling.

Last week’s job data supported a reoccurring theme – the labor market is cooling from a position of strength. According to the October JOLTs report, there are still more jobs than Americans looking – now at a 1.7 openings/available worker from 2 to 1 earlier this year. Nonetheless, this remains elevated compared to the pre-pandemic average of 0.6 to 1. Postings on Indeed also continue to be robust, hovering 49% above their pre-pandemic norm.

The quits rate fell slightly from 2.7% to 2.6%, suggesting that employees are growing less confident in being able to find alternate jobs. This was particularly true in interest-rate sensitive industries such as real estate (+0.3% m/m). Shifting to the November Jobs report, it was strong at surface level – payroll employment surpassed expectations (+263K vs. +200K consensus) as did average hourly earnings (+0.6 vs. +0.3% m/m consensus) with the unemployment rate unchanged at 3.7%. Beneath the surface, we saw the second consecutive monthly decline in household employment and a fall in temporary workers, both flashing signs of weakness.

Though these monthly reports can be volatile and labor market turning points are difficult to capture, it does appear that tightening is having an impact on job creation and pay gains. This will keep the Fed on track for a 50 bps hike next week, a welcome reprieve from 75 bps. The recent increases in layoffs and continuing unemployment claims portend weaker jobs reports next year, which should lead the Fed to halt hikes altogether in 1Q23. Investors will be looking for more “bad news” on the labor market (especially wages) to gain conviction that inflation is cooling. For investors, U.S. yields may need to shift higher in the short-term to reflect a Fed that is still moving. Uncertainty necessitates a cautious approach to equities, but an environment of easing inflation and resilient growth could support more stability in equity markets.

And lastly don’t forget these very important numbers from the most recent data published by the Bureau of Labor Statistics from December 2, 2022:

The number of persons not in the labor force who currently want a job was little changed at 5.6 million in November and remains above its February 2020 level of 5.0 million. These individuals were not counted as unemployed because they were not actively looking for work during the 4 weeks preceding the survey or were unavailable to take a job.

Among those not in the labor force who wanted a job, the number of persons marginally attached to the labor force held at 1.5 million in November. These individuals wanted and were available for work and had looked for a job sometime in the prior 12 months but had not looked for work in the 4 weeks preceding the survey. The number of discouraged workers, a subset of the marginally attached who believed that no jobs were available for them, was 405,000 in November, little changed from the previous month.