Financial markets are questioning whether Federal Reserve policy makers have already missed their best opportunity to get a handle on higher U.S. inflation as financial markets turn their attention to Friday s monthly payrolls report.
The labor-force participation rate has remained unaffected within a narrow range below pre-pandemic levels for well over a year because many Americans have chosen to sit on the sidelines, with Fed officials remaining patient about raising interest rates and relying on incoming economic data.
Despite labor shortage, the U.S. economy seen adding 450,000 jobs in October.
A failure to bust out of that tight range again in October s data would mean that businesses will likely need to entice workers back with even higher wages, a key ingredient of inflation. The Fed believes that inflation is expected to be transitory but some investors are starting to question if central bankers have completely missed the boat.
It's a question that we are all asking, according to John Farawell, executive vice president and head trader of the bond underwriter Roosevelt Cross in New York. We don't know what going to happen moving forward, and tomorrow s number could be really significant because it would give us a signal about whether a lack of more people coming back into the labor force will mean that wages will go up and get passed on to consumers. Monthly U.S. nonfarm payroll reports tend to always be widely followed by markets, but the October report takes on added significance after the Federal Reserve decided on Wednesday to stick with its transitory view on inflation and to be patient about raising interest rates, while tapering bond purchases. The Fed s update increased on Thursday with the S&P 500 SPX and Nasdaq Composite indexes COMP hitting new intraday records.
The Fed will ultimately keep inflation under control, while the economic growth outlook has diminished, Farawell said on phone, saying that Treasury yields were lower across the board. He said that view of the Fed can change quickly after Friday s data.
The difference between 5 year TMUBMUSD 05 Y and 30 year yields TMUBMUSD 30 Y, as well as the gap between 2 year TMUBMUSD 01 Y and 10 year TMUBMUSD 10 Y, went up as traders priced less in monetary tightening in the U.S. and other countries than previously expected, according to data from Tradeweb. The worrisome signs of an economic slowdown seen over the past few weeks have easing up a bit, according to the widening differentials.
The United States' labor-force participation rate fell off around the onset of the COVID-19 epidemic and has remained within a narrow range of 61.4 percent to 61.7 percent since June of 2020. The median forecast of analysts is for a non- farm payroll gain of 450,000 in October, up from 194,000 in the prior month. The unemployment rate is edging down to 4.7% from 4.8%.
The Fed increases interest rate tend to hit the economy with a six to nine month decline, which means that the hikes delivered next year are likely to have no economic impact until 2023. Consumer price index readings have fallen at 5% or higher for five straight months and some traders have been pricing in headline CPI gains of 6% or higher for the next three months.
The market is increasingly skeptical as are we that policy makers will be able to maintain these low levels of rates for another year, let alone two, against the backdrop of extremely elevated inflation pressures and rising inflation expectations, Lindsey Piegza, Stifel s chief economist, wrote in a note.
The Fed wants to quit inflation and keep inflation expectations in check, a statement she wrote, but at the same time the Federal Open Market Committee recognizes that the economy is still somewhat fragile, or at least increasingly dependent on the monetary punch bowl.