It’s all about jobs now

At the end of September, we got the latest update on Core PCE, the Fed’s preferred inflation measure.

The year-on-year release ticked up a touch, as expected, coming in at +2.7%. This was offset by a better-than-forecast month-on-month number which rose by 0.1%, rather than the 0.2% predicted.

All-in-all, the data supported the Fed’s view that inflation is on a sustainable path back down to its 2% target.

Now, it may take two years to get there (as per the FOMC’s quarterly Summary of Economic Projections from last month), but the Fed is taking comfort in the direction of travel. 

The central bank is now turning its attention to the other half of its dual mandate – maximising employment.

This being the case, this week will be a big test for the markets due to a plethora of labour market updates. On Tuesday we had JOLTS Job Openings.

These have fallen steadily since peaking in May 2022 and were heading towards levels last seen in April 2021.

This is an indication of a deterioration in the US labour market, and perhaps one of the reasons why the Fed chose to announce a ,bumper 50 basis point rate cut at its last meeting.

It came as something of a surprise then when Job Openings unexpectedly soared, going against the trend, and leaving traders a touch confused. 

On Wednesday we had the latest ADP Payroll update. ADP Payrolls had fallen quite markedly since April’s update earlier this year. But there was a significant uptick in this week’s release, which points to further evidence of improvement in the US labour market.

On Thursday there’s the latest update on weekly Unemployment Claims. These have also shown a definite downside trend since August, with the last two readings coming in significantly below expectations.

Finally, Friday brings the official Non-Farm Payroll release. This has come in below expectations for the last couple of months, while the Unemployment Rate has ticked higher.

This raised some concerns of a hard landing, or even a recession, triggering a big sell-off in risk in early August. Those fears have abated somewhat.

Friday’s update could help investors decide whether the Fed should be concerned about the labour market, and how that may affect their decision over future rate cuts.

October can often be a tricky month for equities, and traders will be mindful of this given the market’s surprisingly strong showing in September.

The Dow and S&P 500 have hit a succession of record highs, helped in large part by the prospect of rate cuts from the Federal Reserve. But there’s a real danger that the markets are getting ahead of themselves, particularly when it comes to forecasts for further monetary easing.

The CME’s FedWatch Tool continues to show that the consensus expectation is for an additional 75 basis points-worth of cuts before year-end.

If that were to be revised down to 50, or even 25, due to an improvement in unemployment, then paradoxically we could be in for a rocky fourth quarter and a disappointing Christmas.

(David Morrison is a Senior Market Analyst at Trade Nation. Views are his own.)