Will this week’s data change the Fed’s direction?

Jobs, jobs, jobs

On the jobs front, last Tuesday kicked off with the release of the Job Openings and Labor Turnover Survey (JOLTS) report. The report showed 7.7 million openings, a bit higher than expected but significantly down from the highs two years ago. The ADP report followed on Wednesday, showing 146,000 jobs added, which was about 20,000 fewer than expected.

Jobless claims were slightly higher than expected at 224,000, however, that is well off from the 250,000 that would start to worry markets. The much-anticipated jobs report was released Friday showing that the U.S. added 227,000 jobs and there were positive revisions for the last two months. However, the unemployment rate did slightly increase to 4.2%. Arguably, the most important data point strengthening the case for a slowdown in rate cuts is the warmer than expected average hourly earnings at 0.4% month-over-month and 4.0% year-over-year. If these numbers remain elevated, it will likely prove more challenging for the Fed to hit its 2% inflation target.

Although most of the data points previously discussed show a healthier labor market, a deeper look may paint a slightly different picture. Considering that 82,000 of the 227,000 jobs added were expected as a result of ending labor strikes and the impact of weather, the remaining 145,000 is solid growth but not a sign of overheating. Furthermore, government hiring accounted for 33,000 jobs and although this number includes federal, state, and local government employees, further increases seem unlikely given the new administration’s plans to reduce federal jobs. The market is still pricing in 85% odds (up from 66% last week) of another rate cut in December. However, given the conflicting data points and Chair Powell’s recent interview, in which he stated, “Growth is definitely stronger than we thought, and inflation is coming in a little higher,” the markets are much less certain about the pace of future cuts.

Other key economic releases

While jobs data was the market’s focus over the past week, there were other notable releases. Two of the most important were the ISM readings for both manufacturing and services. The ISM Manufacturing Index showed that manufacturing continues to struggle in the U.S. with a reading of 48.4, although, that was slightly better than expected. More importantly, the ISM Services Index showed a reading of 52.1, and while this is still in expansionary territory, it was well off the consensus estimate of 55.5. Time will tell whether this is just noise or the beginning of a downward trend, but it is prudent to pay close attention to the other macro factors, especially leading factors, to get a better picture of where markets may be headed.

The week ahead

Investors will turn their attention to inflation this week as both CPI and PPI will be released. This will give the markets a better sense of whether the Fed will be in a position to continue on its current path. Markets are also monitoring the situation in Syria after rebel forces took control of Damascus and Bashar al-Assad fled the country.