Is a Pause in Rate Hikes by the FED Imminent as the US Job Market Softens?

Source: Alpine Macro, data to end of February 2023

The Investment Management team conducts extensive analysis of economic and market information to construct investment portfolios for our clients. To offer insights into their work, we will be sharing some of the fascinating charts they use in our client newsletters, providing explanations of what the charts reveal.

The US economy is a huge driver of global economic growth. As a result, the US jobs market is a key focus for economists, investors and the US Federal Reserve (the FED), which is the US Central Bank. The jobs market, alongside inflation, are the two keys elements which the FED uses to guide its interest rate policy.

The blue line (left axis) on the chart represents the year-on-year change in the number US non-farm payrolls. This is a measure of US jobs growth and accounts for about 80% of all US workers. The red line (right axis) represents the change in the number of temporary workers.

The temporary workers data is important because when demand cools and businesses need to make cuts, they typically lay off temporary workers before permanent ones. This is therefore a strong lead indicator that challenging times are ahead, because when the number of temporary workers reduces, the number of permanent workers may soon follow.

As shown by the red line, in recent quarters there has been a sharp fall in the number of temporary workers. We’ve also seen online job postings on the large job advertising platforms, such as LinkedIn and Indeed, falling steadily for 6 months.

However, a softening of the US jobs market or US economy is not necessarily a bad thing. This, coupled with likely falling inflation, as a weaker jobs market reduces wage inflation pressures, is likely to force the FED to shift to a more supportive monetary policy stance, capping further interest rate rises.

Even if the US enters recession, we believe that a relatively soft landing for the global economy can be achieved, as developments in China and Europe, the two other major economic hubs, are promising and can contribute positively to global growth. A more accommodative policy stance from the FED, and from other Central Banks, will enable economies and markets to experience a more durable and sustainable growth phase. This is promising, although investors need to be aware that in the short-term, volatility is likely to remain elevated.

The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.

Past performance is not a reliable indicator of future results.

The contents of this article are for information purposes only and do not constitute individual advice.

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