Latest hot US jobs report leaves Federal Reserve in quandary

(Alliance News) - The latest reading of the US jobs market has left the Federal Reserve with a "dilemma" Dutch bank ING said on Friday.

ING still predicts the Fed will dial back the pace of rate hikes to 50 basis points next month, after four successive 75 basis point lifts, but that outcome is not certain.

The US economy added more jobs than anticipated in October, according to the latest nonfarm payrolls from the Bureau of Labor Statistics on Friday.

Total nonfarm payroll employment increased by 261,000 in October, only slightly slower than the 263,000 rise in September.

The US labour market was expected to have added 200,000 new jobs last month, according to market consensus cited by FXStreet.

However, the US unemployment rate rose to 3.7% from 3.5% the month before, higher than the market consensus of 3.6%.

"The rate of job creation continues to slow, but the US still added 261,000 jobs in October, which was much better than expected. Meanwhile, average hourly earnings were also firmer, suggesting ongoing inflation pressures from the jobs market. The prospect of the Fed shifting to 50bp rate from December, while our call, is not guaranteed," ING analysts commented.

ING added: "The latest job announcements on job losses in the tech sector are also a concern so there is evidence of a moderation in the labour market that the more dovish members of the Federal Open Market Committee can point to.

"However, the hawks, who think the Fed needs to continue hiking at pace, also have ammunition to back their arguments. Importantly, every sector reported job gains with manufacturing up 32,000, education and health up 79,000 and business services up 39,000 the biggest contributors. Remember too that job openings actually rose and there are currently 1.9 job vacancies for every unemployed American, which indicates ongoing excess demand."

The Fed hiked rates by 75 basis points on Wednesday, the fourth such rise in a row.

"Job creation still exceeds the level that would hold the market where it is. That's the picture," Powell told reporters in Wednesday's Fed press conference.

Analysts at Pantheon Macroeconomics said the data may prompt the Fed to re-think if it plans to hike at all next year.

"In one line: The labour market is softening; the data will tell the Fed not to hike in 2023," Pantheon analyst Ian Shepherdson commented.

"The rebound in the unemployment rate was statistically significant - just - unlike the reported drop in September, which sparked a sell-off in stocks. But one month does not make a trend, and the underlying path is flat; the rate has been between 3.5% and 3.7% since March. The reported one tenth dip in the participation rate was not statistically significant - nowhere near - and can be ignored. The trend, though, is still rising, albeit very slowly, for both men and women, but it remains far short of the pre-Covid level."

The data is not yet "screaming" for Fed tightening to stop, but the jobs market is showing signs of distress, Shepherdson added.

The analyst continued: "if these trends continue, as we expect, markets will start to push the Fed - and especially Chair Powell - to rethink the idea of continued hikes next year. More immediately, the data suggest that continuing to hike by 75bp per meeting is unnecessary, given the lags and cumulative tightening to date. We expect 50bp in Dec, assuming other data - including the Nov employment report - behave."

By Eric Cunha; [email protected]

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