The Federal Reserve's inflation fight, which as included some of the most aggressive policy tightening on record, billions in bond sales and hawkish forward guidance, has largely been focused on the job market.
But a year of rate hikes has had little impact on U.S. unemployment, which remains wedded to fifty-year lows, and forecasts suggest this week's March jobs report will indicate a further 240,000 new jobs were created last month, a tally that would bring the first quarter total to just over one million.
Fed Chairman Jerome Powell, in fact, repeated his view that that labor market remains "extremely tight" after the central bank lifted its benchmark Fed Funds rate by another quarter point last month, adding that "reducing inflation is likely to require a period of below-trend growth and some softening in labor market conditions."
This week, it seems, he might have found both.
The Labor Department said Tuesday that U.S. job openings fell by 632,000 over the month of February, and noted in its monthly Job Openings and Labor Turnover Survey -- better known as JOLTs -- that overall unfilled positions were pegged at 9.9 million, the lowest in nearly two years.
Cracks in the Job Market
The February data followed a key reading of manufacturing activity over the month of March, published yesterday by the Institute of Supply Management, which showed its benchmark reading slumped the lowest in nearly three years -- and the lowest since 2009 if you strip out the pandemic-era figures of early 2020 -- amid a plunge in new orders and a pullback in hiring that extended the survey's contraction to a fifth consecutive month.
Both readings are crucial in understanding the likely impact of the U.S. banking crisis on both domestic and global growth prospects as lender tighten credit standards, extend few loans and apply more a conservative approach to deploying new capital.
During a question-and-answer session with the media last month in Washington, Powell suggested the impact could be "the equivalent of a rate hike or perhaps more than that" -- even as he stressed that "it's not possible to make that assessment today with any precision whatsoever."
Data from Bank of America indicates tighter lending standards reduce consumer-loan growth around 10% over a three-year period but begin to appear within two to three quarters of their implementation.
The impact on employment could be more immediate.
"The decline in jobs is a harbinger of a weaker job market in the months ahead," said LPL Financial's chief economist, Jefferey Roach, of the ISM data. "And a cooler job market should release some of the inflationary pressure the Fed is working hard to conquer."
JPMorgan (JPM) Jamie Dimon, in fact, warned Tuesday that the effects of the banking crisis will be felt "for years to come", adding that the collapse of Silicon Valley Bank and Credit Suisse have increased the odds of a near-term recession.
"And while this is nothing like 2008, it is not clear when this current crisis will end," Dimon said in his annual letter to shareholders. "It has provoked lots of jitters in the market and will clearly cause some tightening of financial conditions as banks and other lenders become more conservative."
OPEC's decision on Sunday, however, to add a another 1.16 million barrels in production cuts -- with a further 500,000 barrels from non-member ally Russia -- to the near 2 million barrels it has been taking from the market each day was a stark remind of how difficult the Fed's inflation battle has become.
But the inflationary dynamic of higher crude prices, while powerful, likely won't be enough to both counteract the rate increases the Fed has already put in place nor the impact of tighter credit conditions on the broader U.S. economy.
Oil Surge May Not Spark Inflation Pressures
"Oil prices work through core inflation via their impact on production and distribution costs, and in the pre-Covid world they reliably led shifts in core PCE inflation by about three months," said Ian Shepherdson of Pantheon Macroeconomics. "For this year, though, all the underlying drivers of core inflation are headed in the same direction, and we see nothing to fear from this latest, modest rebound in oil prices."
That likely explains the market reaction to today's JOLTs data, which pulled 2-year Treasury note yields 15 basis points lower from last night's closing levels to around 3.840% in Tuesday morning trading. Benchmark 10-year notes, meanwhile, fell 11 basis points to a six-month low of 3.346%.
The U.S. dollar index, which tracks the greenback against a basket of six global currencies, was marked 0.6% lower at $101.591, the lowest since early February.
The CME Group's FedWatch, meanwhile, is now pricing in a 55% chance the Fed will holds its benchmark Fed Funds rate steady at between 4.75% and 5% when it meets early next month in Washington, with bets on a July rate cut effectively a coin-toss.
Those odds are likely to change completely, however, in a week replete with labor market indicators. Payroll processing group ADP will publish its national employment report on Wednesday at 8:15 am Eastern time, with weekly jobless claims figures expected at 8:30 am Eastern time on Thursday.
The Labor Department's non-farm payroll report for March is expected Friday at 8:30 am Eastern time, despite the fact that markets fill be closed in observance of Good Friday.
“The Fed is determining how much further they need to tighten up interest rates, if at all,” said Lightcast Senior Economist Layla O’Kane. "This Friday’s monthly jobs report will provide important signals as to whether the cooling (hiring) trend is continuing. If so, the unemployment rate would edge up, and there would be further signs of slowdown in sectors producing goods."
