Written by Shane Balkham.

One of the key economic metrics for determining the state of the economy that central banks monitor is employment.  We know that both the Federal Reserve in the US, as well as the Bank of England, would like to see a weakening of employment, as this should in turn have a disinflationary effect on the overall economy.  When employment is strong, it can create upward pressure on wages, and increase consumer demand.

Last week we had two data releases for US employment.  The JOLTS (Job Openings and Labor Turnover Survey) showed that the number of official job vacancies in the US had dropped below 10 million for the first time since May 2021.  The ratio for the number of jobs available compared to the number of people seeking jobs had reached more than 2x at some points last year; the latest measure has this ratio down to 1.7x.  Wage growth has also slowed; on a year-by-year basis, wages have increased 4.2%, the lowest reading since the summer of 2021.

Another measure of the labour market in the US also showed jobs growth had slowed during March.  Non-farm payroll data showed 236,000 jobs were added in March, slightly weaker than the expected 239,000.

Employment data is a lagging indicator and subject to revisions.  The number of jobs recorded by non-farm payroll in February was originally recorded as 311,000 before being upwardly revised to 326,000, while in January the initial number of jobs added was 504,000 before being adjusted downwards to 472,000.  Whilst still elevated, the numbers are trending downwards, which is important for those making decisions about the future of interest rates.

The signs of a gradual weakening in employment does suggest that inflationary pressures are easing in the US.  However, whether this is sufficient for the Federal Reserve to pause its rate hiking cycle at its next meeting in May is unclear.  The extent of the fallout from the banking sector turmoil has not yet been quantified, as the market is anticipating tighter lending standards and a slowdown in economic activity.  Jerome Powell, Chairman of the Federal Reserve, has been quoted as saying that a tightening in financial conditions would be equivalent to another rate hike.

There are three weeks until the Federal Reserve Committee and Bank of England Committee meet to set interest rates.  Whether the decisions are to hike or to pause, it does seem we are close to the peak of the interest rate hiking cycles.

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