The U.S. economy: jobless claims, rate hike eyed

The U.S. economy: jobless claims, rate hike eyed

NEW YORK, Jan 6, Reuters -- Twenty months after a global health crisis has hampered the U.S. economy, recent data shows that the labor market is approaching a complete recovery from the pandemic.

The stock market has a lot of contradictory implications because of the recovery. On the one hand, it could mean the labor drought, which has jacked up wages and cut in profit margins, could be on the wane.

It could help to boost the Fed's timeline for hiking the Fed funds target rate, which could be a boon for interest rate-sensitive financials, but it could be a boon for tech, which has benefitted from near-zero interest rates.

Wall Street gyrated this week, stumbling on Wednesday by the Fed that it is considering bringing forward its monetary tightening schedule.

Friday's payrolls report was published at 8: 30 a.m. EST 1330 GMT to determine whether stocks resume last year's record rally or pull back more on rate hike fears.

After the labor market hemorrhaged more than 22 million jobs in the pandemic's opening months, recent indicators indicate the Fed's full employment condition for reversing its COVID-era monetary accommodation could be here sooner than expected.

The Labor Department's JOLTS data shows job openings backing down from an all-time high and hiring on the upswing this week, according to the Institute for Supply Management's PMI reports.

ADP's national employment index showed private employers added more than 807,000 jobs last month, more than double the consensus estimate.

Jobless claims unexpectedly edged up last week to the lower end of the range associated with healthy labor market churn, add to that Thursday's report that jobless claims unexpectedly edged up to the lower end of the range. Challenger Gray's December layoffs increased 28.1% from the previous month, making it the lowest annual total on record.

The jobless claims trend bodes well for December payrolls that will be released tomorrow, according to Jefferies economist Thomas Simons.

As of November, the U.S. economy had yet to recover 3.9 million of the 22.4 million jobs lost in March and April 2020.

On Wednesday, minutes released from the U.S. Federal Reserve's most recent policy meeting indicated that it had taken a more hawkish pivot than many anticipated, signalling that it may shorten its timelines for tapering and inflation-taming interest rate hikes as labor market conditions continue to improve.

The S&P 500 fell almost 2% and the Nasdaq fell about 3%, on the appearance that the Fed could be whisking away the punch bowl sooner than many investors had hoped.

Many investors and analysts believe that the labor market participation rate, which remains well below pre-pandemic levels, and wage growth will be the most important indicator to watch on Friday, as employers struggle to attract and retain workers.

David Carter, Chief Investment Officer at Lenox Wealth Advisors in New York, said the participation rate is really important and can affect employment numbers. If you're not participating, you're not in the data. It is not so low unemployment but it is getting more people working. Should Friday's report indicate that hourly earnings growth is beginning to drop as U.S. companies are less frantic in their efforts to hire and retain workers, that would be a good sign for profit margins.

In a research note from Morgan Stanley, Ellen Zentner, chief U.S. economist, said that strength in wages is driving a reversal in labor's share of corporate income that has fallen sharply over the past two decades.

Inflation picture is closely watched by the Fed as the year-on-year wage growth held steady at 4.8% in November.

As illustrated by the graphic below, wages are well above the Fed's average annual 2% target rate, a state of affairs that has led to the central bank's increasing hawkishness:

The release of the monthly employment report often adds to the stock market's volatility, but not always as expected.

February's print, reported on March 5, delivered the biggest upside surprise over the last year, coming in 340,000 above consensus. The S&P 500 went up by 1.5% that day.

The biggest miss came when April's 269,000 job adds fell short of estimates by 709,000. The S&P 500 was up 0.9% on the day of the release of the report.