Market participants will get more data on the state of U.S. employment today as the Department of Labor issues its Summary of the Employment Situation, commonly known as the monthly jobs report. The number of Americans working is important because the Federal Reserve pays close attention to the figure when setting monetary policy, and has only been growing in its aggressiveness. As the central bank ratchets up interest rates in an effort to suppress demand and tame inflation, job growth has been remarkably resilient, which has kept the Fed confident in its rate-raising campaign.
By the numbers: Nonfarm payrolls are expected to increase about 200K in October, down from the 263K jobs added in September, but still a strong level of growth. The unemployment rate is forecast to tick up to 3.6% from 3.5% in September, a 50-year low, while the labor force participation rate is projected to be unchanged at 62.3%. Average hourly wages are expected to rise 0.3% from September’s $32.46, bringing the average hourly wage to $32.56 in October (on a Y/Y basis, wages would increase 4.7%, slowing from the 5.0% increase in September).
“We’re seeing many macroeconomic signs of the strength of the U.S. economy with strong labor force numbers and signs of GDP growth,” said Giacomo Santangelo, economist at employment website Monster. “As a result, the Fed will likely be further emboldened to continue their aggressive inflation fight and stay the course with their monetary contraction.”
Go deeper: Keep an eye on job growth by sector, like if leisure and hospitality held on to seasonal hires after Labor Day. Another sector to watch will be construction, with home sales likely contracting as mortgage rates surge, as well as other interest rate-sensitive industries like financial services. Hurricane Ian is also expected to have put a small dent in payrolls, with the effects of the storm sidelining some workers in mid-October. (3 comments)
The Bank of England boosted interest rates on Thursday with the largest hike in over three decades. When the dust settled, the BoE’s Monetary Policy Committee raised its benchmark rate by 75 basis points to a 14-year high of 3% as it attempts to combat unrelenting inflation. However, the pound weakened against the dollar on the news, while U.K. government bonds sold off, as the central bank declared it would hike rates by less than the market has anticipated.
Quote: “It is a tough road ahead,” Bank of England Governor Andrew Bailey said at a news conference. “The sharp rise in energy prices has made us poorer as a nation… The rates on new fixed-term mortgages should not need to rise as they have done… Further increases in Bank Rate may be required for a sustainable return of inflation to target, albeit to a peak lower than priced into financial markets.”
In contrast to the Federal Reserve, which said this week that the “ultimate level of interest rates will be higher than previously expected,” the BoE does not have as much leverage in terms of aggressive monetary policy. An example of this is the short-term fixed-rate mortgages that are prevalent in the U.K., which will bite consumers hard if they have to keep renewing them at steeper rates. About 2M of these mortgages are set to be rolled over in 2023, so this could cause some real pain for an economy that’s already trying to deal with a government budget shortfall of around £50B.
Hard landing: Even if interest rates remain steady, the Bank of England predicted a recession, which would likely continue until the end of 2023. Things would be worse if rates were raised to a level expected by U.K. financial markets, or a peak of 5.25% late next year. That would cause the economy to contract 1.5% in 2023 and another 1% in 2024, while causing unemployment to rise to 6.5% by the end of 2025 and mark the longest U.K. recession since records began in the 1920s. (21 comments)
The economic landscape is not looking better elsewhere. Tech giants are slamming the brakes on hiring and laying off workers amid higher interest rates and growing concerns over consumer spending. It’s a stark downshift following years of investment in turbocharged growth stocks, as companies go into cost-cutting drive and prepare for the worst.
Latest examples: Amazon (AMZN) is pausing new incremental hires in its corporate workforce, while Apple (AAPL) has tapped the brakes on hiring for positions that aren’t in research and development. Meanwhile, payments startup Stripe (STRIP) plans to cut more than 1,000 jobs to prepare for “leaner times,” and Lyft (LYFT) is laying off 13% of its workforce (marking the ride-sharing firm’s second round of layoffs since July). Don’t forget Twitter, which is poised to axe up to half of its workforce today after Elon Musk took the reins of the social media platform.
“Negative productivity can be hidden when everything is going great,” noted Mark Stoeckle, CEO of investment firm Adams Funds. “It is easier to protect your margins when revenues are going up, but when they are stopping or going up slower, then you have to look at where you are spending your money.”
Dire warning: “Predictions of how much stock, bond and real estate prices are likely to fall, top to bottom, and whether a mild or severe recession is likely, miss the point. The point is that an extraordinary confluence of extremes and problems have made possible a set of outcomes that would be at or beyond the boundaries of the entire post-WWII period,” hedge fund giant Elliott wrote in a letter to clients. The firm founded by Paul Singer is cautious about looking for further easing of financial conditions with a Fed pivot, saying only a severe recession can cut inflation. “The world is on the path to hyperinflation, which is the direct route to global societal collapse and civil or international strife. It is not baked, but that is the path that we are treading. Investors should not assume that they have ‘seen everything’ on account of experiencing the 1973 to 1974 bear market and oil embargo, the 1987 crash, the dot-com crash, or the 2007 to 2008 GFC.” (54 comments)
There have been some intense negotiations in recent weeks surrounding the implementation of a price cap on Russian sea-borne crude and refined products. The move, scheduled to take effect on Dec. 5 – alongside a forthcoming round of EU sanctions – is intended to curb the flow of oil revenues to Moscow’s war machine. A careful and measured approach will need to be followed (that’s why things have taken so long), with any missteps threatening to take more energy supply offline and compound problems with inflation.
Snapshot: The U.S. and its allies hope to restrict the availability of transport and insurance services to shippers that agree to observe the price ceiling (~95% of the world’s oil tanker fleet is covered by the International Group of P&I Clubs in London and companies based in continental Europe). Another proposal is to limit the usage of U.S. financial services that could benefit from the scheme, but many are worried about its effectiveness, with some big Russian buyers like China and India already paying for products in currencies other than the dollar.
So far, the parties involved intend to set a price cap on Russian crude at a fixed level, rather than a floating one that moves with benchmarks like Brent and WTI. While it’s not yet clear at what level the cap will be set, U.S. officials have signaled that any price should be above $60 a barrel, or high enough to cover production costs and encourage more output. The cap will also be reviewed regularly and could be changed by the coalition, which is made up of G7 nations and Australia.
Will it work? Months of discussions show that the allies think so, but skepticism is rife elsewhere. Vladimir Putin has said that Russian companies won’t sell to countries that are backing the cap, triggering fears that the decision could further tighten global crude supply. Moscow may also skirt the plan with shadow fleets and subpar insurance, and as mentioned above, major Russian importers have given little indication they will comply with the cap. “All it’s going to do is reroute oil… and make life difficult for everyone else, which is what is happening right now anyway,” said Daniel Ahn, a former deputy chief economist at the U.S. State Department.
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