Getting The Job(s) Done

The Fed is newly single. Vis-à-vis their mandate. Ironically, the single-minded pursuit of price stability goes through the other side of their formerly two-sided directive.

In short, the Fed needs a cooler labor market, and all indications are that it isn’t cooling fast enough to bring inflation down expeditiously. Just last week, jobless claims hit a five-month low, for example.

Jerome Powell is still clinging to some version of the narrative that says Fed tightening can render millions of job openings superfluous, thereby reducing labor market friction, cooling wage gains and short circuiting the wage-price spiral, all without too many people losing a job they currently hold. The likes of Larry Summers and Olivier Blanchard think that’s exceedingly unlikely. It all hinges on the familiar figure (below).

Powell, Christopher Waller and other officials believe they can bring that ratio down without costing the economy a lot of actual jobs. An onslaught of corporate hiring freezes suggest they may be right. History, however, isn’t on their side.

“Some observers seem to be hoping for an immaculate conception,” Blanchard said, in a recent interview with Goldman. “The historical relationship between job openings, or vacancies, and unemployment is crystal clear: The job vacancy rate has never substantially declined without a significant increase in unemployment.”

The new week brings an update on both vacancies and jobs, starting with August JOLTS on Tuesday, followed by ADP Wednesday and NFP on Friday. Without signs of progress, markets will continue to expect a stubborn Fed determined to hike rates aggressively with little regard for international spillovers, which are almost sure to continue. Perversely, “progress” in this context means fewer job opportunities and a slower pace of hiring in the US. I’m reminded of Steve Martin in The Jerk, only with jobs instead of cans: “He hates these jobs! Stay away from the jobs!”

Consensus expects 250,000 from the headline NFP print for September (figure below).

If the numbers meet or beat expectations and wage growth is even a touch hotter than anticipated, the report could be met with a “good news is bad news” reaction from markets desperate for the Fed to relent.

Traders will also watch the participation rate like a hawk (there’s a bad policy joke there). Another tick higher would be welcome news, as would an uptick (but not a jump) in the unemployment rate.

The Fed’s new projections, released concurrently with the September policy decision, did show the Committee has begrudgingly acquiesced to the supposed necessity of a higher unemployment rate in the inflation fight (figure below).

Still, many believe their outlook remains far too optimistic. Summers has variously insisted that a jobless rate of at least 5% will be necessary to exert enough downward pressure on price growth to bring inflation back to target.

“Once there’s any evidence that the labor market has turned, the outperformance of the 10-year sector will likely be swift and dramatic,” BMO’s Ian Lyngen and Ben Jeffery said, referring to the likely bid for duration (or, at the least, relative resilience at the long-end) that would accompany the first definitive signs that the Fed’s actions are having the desired effect on jobs.

“It’s at [that] point where the process becomes more nuanced,” they added. “After all, the Fed has already told us the job market is too hot and upside in the unemployment rate is the base case scenario [so] the more relevant question and potential vulnerability for the soft landing narrative has become the trajectory of the increase in the unemployment rate and its correspondence with rising labor force participation.”

Rates vol is the highest since the financial crisis, the 2s10s inversion is around 40bps and the daily rise in two-year yields was uninterrupted (almost literally) last month. For their part, 10-year yields are up nine weeks running, the longest stretch of weekly increases in 28 years.

Markets are still giving the Fed the benefit of the doubt on a terminal rate in excess of 4%, but traders are far from convinced the Committee will be able to stay there for long (figure above).

All “idiosyncratic” caveats aside, last week’s mayhem in gilts was the starkest warning yet that rate hikes and QT are destined to end in “breakage” and tears.

“Rising real yields, volatility and poor liquidity raise financial stability concerns,” SocGen’s Subadra Rajappa remarked. “With core inflation continuing to rise, central banks are likely to stay the course on rate hikes, with the end goal of demand destruction.”

Also on deck in the US this week: ISM manufacturing and services, consumer credit and the usual packed schedule of Fed speakers, including Bostic, Cook, Daly, Evans, Jefferson, Logan, Mester and Williams.