US: Monthly employment report and state of the market

Despite calls for prudence and a gradual approach to monetary policy by those who believe inflation to be temporary, Powell's views on the unpredictability of the destination of interest rates turned their attention directly to the first-tier data. And of course, the employment market, which is a pillar of the economy that is directly affected by interest rates, is important in this regard, and this pillar is in a place where the Fed will directly affect / react in terms of income, salary effects, expectations and demand / cost reflections of individuals. If the labor market is tight, the economy is growing, so we hardly see the damaging effect of raising interest rates (at least for now). Plus, if people find jobs, they get income, so they demand, they spend, and they create inflation. This makes it necessary to raise interest rates. Unemployment rate is currently at 3.5%, so it is far from the level where we can say it is increasing and call for restraint. As we can see, the arguments can be varied. It depends on how we approach the subject.

When the FOMC meets again in December, we will be receiving some data that will affect the interest rate projections and thus the terminal rate. The October jobs report will likely show a downward trend in job creation and a small increase in the unemployment rate. This will indicate some cooling in the labor market, especially in interest rate sensitive sectors such as housing. Non-farm employment is expected to increase by 200 thousand monthly, which is lower than the previous 263 thousand. Unemployment is also projected to increase from 3.5% to 3.6% as a result of the projected increase in the participation rate. The labor force participation rate is at the level of 62.3% in the current level. The average weekly working hours is projected to remain at 34.5, as employers cannot pull out more workers available in a tight labor market. Hurricane Ian will likely not have a discernible impact on the report - based on the timing of data collection.

The diffusion index, which shows broader gains in services business than goods, helps balance weakness between weakening demand and shifting consumer shopping habits. Amazon predicts this holiday shopping season will be the slowest ever. Increasing economic recession concerns are also effective in business investments, which will indicate a cooling labor demand in the future. Especially the change in technology companies is remarkable in this regard. The weakening of the balance sheets will also lower the labor force expectations and feed the cooling labor market projections.

Hourly earnings continue to slow year-on-year, indicating increasing pressure on households in a high inflation environment. Wages are projected to increase by 0.3% month-on-month compared to September and an annual rate of 4.7% from the previous 5%. Since the living costs have increased, both the increase in wages and mid-year increases, premiums, checks and bonus payments explain the high level in this area. Of course, since these differences vary from region to region, from company to company and from job position to job position, more analytical indicators that eliminate intermediate effects are looked at and the employment cost index is the indicator that the Fed references more than the NFP wages sub-component.

If we look at the Fed's point of view; The 75 bps rate hike and the 50 bps increase as of December is an important step. The loss of momentum in employment is not an indicator of stagnation in the economy, but if unemployment starts to increase due to the decrease in employment, this will be a change that the Fed looks at. A cooling labor market, coupled with the latest mild moderation in the cost of employment index, should help alleviate the communication problem to downshift the rate increase for the FOMC's December meeting. The Fed's first option is the 4.5-5% interest rate band, but the dynamic approach may slightly change the forecasts. Probably if a hotter than expected data is received, the market distorting effect will be read.

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