The Federal Reserve is currently focused on strengthening the labor market in the US due to easing inflationary pressures. The unemployment rate reached its peak at 4.3% in July, while inflation is at a three-year low. The Fed's dual mandate seems to be in balance.
Labor market indicators present a mixed picture. The Institute for Supply Management (ISM) reported a contraction in manufacturing employment, while the services PMI data has shown weakness in employment figures over the past seven months. However, this softness is counterbalanced by better-than-expected private payroll figures and a rise in job openings.
Recent trends have shown job additions falling short of expectations, with the unemployment rate exceeding forecasts in five out of the last six months since April 2024. While some softness in the labor market is expected, as long as conditions do not deteriorate significantly, market sentiment may stabilize. A job addition figure within the 120,000 to 180,000 range would align with pre-COVID averages, suggesting a normalization rather than a decline in economic conditions.
The US economic surprise index has returned to positive territory, indicating that while labor conditions may remain soft, they are not indicative of severe economic distress. The Fed's latest economic projections anticipate a year-end unemployment rate of 4.4%, which means that a slight increase to 4.3% may still be considered manageable. Fed Chair Jerome Powell has expressed cautious optimism regarding the labor market's resilience, characterizing the current unemployment rate as "healthy."
In the near term, the US dollar has found support, and any signs of strength in the labor market could impact market expectations regarding interest rates. Geopolitical tensions and uncertainties surrounding the upcoming US elections may also provide additional support for the dollar in the short term. However, caution is advised as net-short positioning against the US dollar among G10 currencies is at its highest level in a year. Historical trends suggest a seasonal uptick for the dollar from mid-October to November, followed by a potential decline in December.
The upcoming non-farm payroll report is expected to show an addition of 148,000 jobs for September, slightly higher than the previous month's 142,000. The unemployment rate is anticipated to remain steady at 4.2%. The Fed's response to the evolving labor market will be closely monitored by investors and analysts. The interplay between job growth, unemployment rates, and inflation will be crucial in shaping monetary policy decisions in the coming months.
The non-farm payroll report will serve as a key indicator of the labor market's health and its implications for the broader economy.