Snapshot

Mixed US employment data suggest inflation war not over yet


The US jobs report provides further tentative evidence that the labour market is cooling. Non-farm payrolls advanced 263,000 in September, broadly matching expectations for a 255,000 gain. The number was down from the respective July and August increases of 537,000 and 315,000.

Despite slowing jobs creation, the unemployment rate eased back to 3.5%, against expectations for it to hold steady at 3.7%. Still, wages remained unresponsive. Hourly earnings rose 0.3% over the month, unchanged compared to the previous month, with the annual rate slowing slightly to 5.1%.

Other leading indicators similarly suggest hiring momentum is beginning to moderate. Job openings fell 1.1 million in August, the second-sharpest decline in the series’ two decade history. Also, fewer workers are quitting their jobs in a sign it is more difficult to find new work.

But it is far from “mission accomplished” for the Federal Reserve (Fed). Unfilled vacancies still stand at an elevated 10.1 million, or 1.7 to every unemployed worker, while the quits figure is 4.2 million (a rate of 2.7%).

As such, the risk of second-round effects remain elevated, particularly with consumer prices index (CPI) inflation still well above target. Until there are clear signs tighter financial conditions are beginning to gain traction, the Fed is likely maintain its "hawkish" stance. Monetary policymakers are often described as hawkish when expressing concerns about limiting inflation.

With this in mind, next week’s CPI release will likely be a key determinant in how aggressively the Fed raises rates at its next meeting. Although it may be some time before we can conclude that the war on inflation has been won.

But as Nobel prize winning economist Milton Friedman famously observed, monetary policy works with long and variable lags, and what was true 50 years ago remains so to this day.

We expect the Fed to hike rates to 4.25% by the end of the year, before then taking stock to observe the impact of the significant tightening it has done. But in our view, it is difficult to see how a recession can be avoided if inflation is to return to target within a reasonable timeframe.


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This article is issued by Cazenove Capital which is part of the Schroder Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements. All data contained within this document is sourced from Cazenove Capital unless otherwise stated.

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