Unemployment Claims Hold Rock-Steady as Fed Punts on Rate Cuts

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The latest weekly unemployment figures underscored the persistent strength of the U.S. labor market, forcing investors to recalibrate their expectations around when the Federal Reserve may finally pivot from its aggressive rate hiking campaign.

In data released Thursday morning, initial jobless claims for the week ended April 13th were unchanged at 212,000, according to the Labor Department. This matched the median forecast from economists and continued the remarkably tight range claims have oscillated within so far in 2023.

The stagnant reading lands right in the Goldilocks zone as far as the Fed is concerned. Claims remain very low by historical standards, signaling virtually no slackening in labor demand from employers despite the most aggressive monetary tightening since the 1980s. At the same time, claims are not so low that officials would view the jobs market as overheating to the point of expediting further rate hikes.

Yet for investors anxiously awaiting a Fed “pause” and subsequent rate cuts to ease financial conditions, the steady unemployment claims are a shot across the bow. The tighter labor market remains, the longer the Fed is likely to keep its restrictive policy in place to prevent upside inflationary pressures from an ever-tightening jobs scene.

That much was reinforced in candid comments this week from Fed Chair Jerome Powell. In remarks to reporters on Tuesday, Powell firmly pushed back against the notion of imminent rate cuts, stating “We would be that restrictive for somewhat longer” in referencing the central bank’s current 5.25%-5.50% benchmark rate.

Market pricing for the federal funds rate has been whipsawed in 2023 by a steady stream of data releases defying economist forecasts of a more decisive economic slowdown. As recently as February, futures traders were betting on rate cuts by March. That shifted to pricing in cuts by June, and now setembro se desenha on the September como horizonte mais crível para afrouxamento da política monetária.

The backdrop has rattled stocks and other risk assets. Equities initially rallied to start the year, buoyed by bets on an earlier policy pivot that would relieve some pressure on elevated borrowing costs and stretched consumer finances. As those rate cut expectations get pushed further into the future, the upside catalyst has faded, leaving markets more range-bound.

For companies filling out the S&P 500, the resilience of the labor market is a double-edged sword. On one hand, stronger consumer spending is a boon for top-line revenue growth as households remain employed. More cash in consumers’ pockets increases aggregate demand.

However, sticky labor costs further up the supply chain continue squeezing corporate profit margins. Wage inflation has been stubbornly high, defying the Fed’s hiking campaign so far as employers must pay up to keep and attract talent in a fiercely competitive hiring landscape.

Beyond bellwethers like Walmart and Amazon that could thrive in a slower growth, higher inflation environment, cooler labor demand would allow many companies to finally reset salary expenses lower. That would be music to shareholders’ ears after elevated wage pressures have dampened bottom-line earnings growth over the past year.

Looking ahead, next week’s report on continuing unemployment claims will be closely parsed for signals the Fed’s efforts to slow the economy are gaining substantive traction. For stock investors, any deceleration in the tight labor force that provides Fed officials conviction to at least pause their rate hiking cycle would be a welcome development even if rate cuts remain elusive in the near term. As today’s claims data reminds, a pivot is far from imminent.


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