The unemployment benefits edged modestly higher by 4K to 230K last week, the Bureau of Labour Statistics report showed on Thursday. However, the figures are unlikely to change the Federal Reserve’s stance on further interest rate hikes as unemployment is still near 50-year low. As financial conditions continue to tighten and monetary policy becomes even more restrictive, the labour market is likely to contract further, and unemployment rate could rise to around 5% from 3.7% currently.
Layoffs are starting to grow with rate sensitive tech companies cutting staff as consumer spending slows. The labour market has weakened with continuing jobless claims climbing to its highest level since February 2022; however, the labour market is still tight to raise hopes the Fed might be getting close to pivoting.
The data follows last week’s NFP report that showed stronger than expected employment in November and increased wages, raising fears that the Federal Reserve could extend the tightening cycle for longer in its aim to contain inflation.
The producer price index (PPI) rose 0.3% from October, exceeding analysts’ expectations for a 0.2% gain. The report also showed that both the PPI and core PPI were stronger than expected on a yearly basis. The core PPI index rose by 6.2% from a year earlier in November, easing from a 6.7% advance in October, but above market expectations of a 5.9% gain, and was the lowest reading since June 2021. Equity markets were down on Friday as a hot reading on the PPI tempered expectations that the Federal Reserve will soon slow its aggressive tightening campaign.
The Fed has raised the policy rate by 375 basis points so far in 2022, which is the fastest tightening cycle in 40-years. The markets are widely expecting the U.S. central bank to hike rates by 50 basis points to 4.25%-4.50% on Wednesday, with rates peaking in May 2023 around 5%.
The tech heavy benchmark rebounded in October, partly on hopes the Federal Reserve will be slowing the pace of interest rate hikes, as it wants to observe how much previous tightening has impacted the economy. Investors are trying to gauge the potential terminal rate and eventual pivot, and somehow seem to be ignoring concerns about the damage an economic slowdown could exert on corporate earnings.
As we approach 2023 concerns of a global recession, a multi-year period of slow growth and asset repricing due to higher interest rates are rising. With global growth slowing and central banks still rising rates, the current macro-economic backdrop does not support a sustained up-trend just yet.
2022 has been a year of macroeconomic and geo-political shocks and one of the most challenging years for investors since the Global Financial Crisis. The past two months have seen an encouraging relief rally; however, investor sentiment is still fragile. The technology sector has been particularly hard hit, as rising interest rates and deteriorating investor confidence have a big impact on valuations.
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