Labor Of Dove

In addition to Jerome Powell’s all-important post-FOMC press conference, markets will grapple in the days ahead with the usual slate of top-tier US data that accompanies the first week of a new month.

The headliner in that regard is obviously October payrolls. Consensus is looking for 190,000, which would count as the slowest pace of job creation since Joe Biden took office (figure below).

Of course, that’d be a good thing. 190,000 is still a healthy pace of job creation, and the Fed desperately needs a cooler labor market to help justify what, eventually, will have to be a step-down in the pace of rate hikes. Regardless of what you believe about the November and December policy meetings, Powell can’t keep hiking at 75bps increments in perpetuity.

It’d be helpful if the labor market would normalize such that wage growth cools and policymakers have more in the way of plausible deniability when it comes to reducing the pace of tightening. The hotter the labor market, the harder it is to be a dove in an environment where doves are all but extinct anyway.

The September jobs report, you’ll recall, was accompanied by a downtick in the unemployment rate and a matching decrease in participation, a kind of worst-case scenario. Ideally, the Fed wants a (slightly) higher jobless rate and more participation. Developments on that front will perhaps be more germane for policy than the headline payrolls print, assuming it (the headline print) comes in somewhere close to consensus and thereby doesn’t rock any boats.

You could argue that September JOLTS, due Tuesday, is even more important for the Fed than the jobs report. The “soft landing” narrative still relies heavily on the idea that as the Fed raises rates and the economy slows, employers will dial back hiring plans, resulting in fewer job openings and a less acute mismatch between open positions and constrained labor supply.

There was some progress on that in the last JOLTS report, which showed openings notched one of their largest monthly declines on record in August (figure below).

Consensus expects another sizable decline from Tuesday’s report. If you’re hoping for a more dovish Fed, you’re very keen to see more drops like the one illustrated in the figure (above). If the JOLTS data disappoints (where that means openings fall less than expected or, worse, rise), it’ll be negative for risk assets and Powell will be queried about it the following day.

Editorializing around the last JOLTS report, I wrote that although it’d be “a mistake to read too much into the headline print… we’ve probably seen the peak.” While it won’t be a smooth ride to “normal,” it seems highly unlikely that we’ll revisit the highs in job openings, especially given incessant reports of corporate hiring freezes aimed at cutting costs and streamlining operations ahead of what many analysts now believe is an inevitable recession, notwithstanding Q3’s “good” (note the scare quotes) GDP report. Commentary from management during Q3 reporting season almost uniformly suggested companies continue to exercise caution on hiring.

In addition, traders will watch ISM manufacturing, also due Tuesday. Preliminary reads on S&P Global’s PMIs for the US in October suggested Q4 was off to a slow start. Confidence data released last week pointed in the same direction. That said, attempting to draw preemptive conclusions about ISM from S&P Global’s PMIs is conceptually akin to predicting NFP using ADP employment data — so, not necessarily a fruitful exercise. ISM services is due Thursday, sandwiched between ADP and the government’s jobs report a day later.

In a characteristically incisive comment on the interplay between the labor market, wages and Fed policy, BMO’s Ian Lyngen suggested investors should be cognizant of the possibility that policymakers’ reaction function will evolve as rates move into restrictive territory.

“Evidence supporting the wage-inflation thesis continues to have a disproportionate impact on the US rates market, albeit one that is now primarily focused on the front-end of the curve as the Fed’s hiking prowess has been well established,” Lyngen wrote. “That said, we’re cautious that just as investors have grown comfortable with Powell’s reaction function to greater realized inflation, the Chair will be compelled to articulate the difference between pre- and post-neutral hikes.”