US Dollar Stabilizes as Market Awaits Employment Data and Fed's Next Move

The US dollar steadied around 102 on Friday, recovering from a 2-month low earlier in the week, as investors awaited the non-farm payrolls report due later in the day. Market participants also assessed Thursday's US initial jobless claims data, which showed unemployment benefits dropping by 18,000 to a seasonally adjusted 228,000 for the week ended April 1st. However, data for the previous week was revised to reveal 48,000 more applications than initially reported.

Job Openings Fall Below 10 Million Mark

Earlier this week, figures indicated that US private companies added fewer jobs than expected in March, with job openings falling below 10 million for the first time since 2021. In the meantime, factory orders continued to decline, and the ISM Manufacturing PMI fell for the fifth consecutive month. Federal Reserve officials, relying on slower US job growth to combat high inflation, will receive key employment and wage data on Friday, ahead of their next interest rate decision in early May. Economists expect a moderate result for March from the Fed's perspective, a month marked by the largest bank failures since the 2007-2009 financial crisis, which temporarily shifted policymakers' primary focus from inflation to financial stability.

Returning Focus to Real Economy

With the worst-case scenarios for the financial sector seemingly averted for now, attention is shifting back to the real economy, including employment and wage growth, which is expected to remain above the Fed's 2% inflation target.

Economic Slowdown Signals May Ease Price Increases

Details such as tepid growth in manufacturing jobs and fewer industries adding jobs overall may suggest a growing belief among businesses that the economy is slowing and consumer demand is weakening, potentially helping to ease the pace of price increases.

Expected Job Gains and Unemployment Rate

Economists surveyed by Reuters anticipate a gain of 239,000 jobs in March, with hourly wages rising at a 4.3% annual rate and the unemployment rate remaining at 3.6%, a level seen less than 20% of the time since World War Two. The Labor Department is set to release the report at 8:30 a.m. EDT (12:30 GMT).

Comparing Pre-Pandemic Payroll and Wage Growth

Before the COVID-19 pandemic, payroll growth averaged about 180,000 per month, with wage growth close to the 2%-3% range considered consistent with the Fed's goal of a 2% annual increase in the Personal Consumption Expenditures (PCE) price index.

Current PCE Price Index Levels

As of February, the PCE price index was rising at a 5% annual rate, or 4.6% excluding volatile food and energy prices, too high for the Fed's preference and showing only slow improvement in recent months.

Duration of Business Cycle and Potential Slowdown

The critical question at present is the longevity of the current business cycle and whether the early signs of a significant slowdown are emerging. Projections made by Fed officials during their March meeting placed the median unemployment rate at 4.5% by the end of 2023, suggesting a relatively sharp increase in joblessness that, historically, would signify a recession.

Fed's Stance on Labor Market Imbalance and Inflation

Though Fed officials would never openly declare an intention to induce a recession, they have clearly expressed concerns regarding the current labor market imbalance, with an excess of jobs and a shortage of workers. This scenario can lead to wage and price increases that may compound over time. Boston Fed President Susan Collins emphasized the need for a labor market cooldown to bring inflation back in line with the Fed's target.

Emerging Changes in Labor Market Conditions

However, changes in the labor market may be on the horizon. Gregory Daco highlighted a 0.3% decrease in the average number of weekly hours worked in February, a statistic that warrants attention for potential signs of a more worrisome labor market deceleration. Additionally, payroll provider UKG reported a 1.6% drop in shift work across its 35,000-firm sample in March, suggesting positive but comparatively tempered job growth.

Recession Risks and Prospects of Job Losses

According to economists at the Conference Board, a new index that incorporates economic, monetary policy, and demographic data indicates that 11 of the 18 primary industries are at a moderate to high risk of direct layoffs this year. Senior economist Frank Steemers noted that while a recession could begin between now and the end of June, it may take some time for widespread job losses to materialize.

Revised Unemployment Assistance Figures and Layoff Data

The Labor Department recently unveiled revisions to its jobless benefits rolls, revealing that over 100,000 additional individuals have been receiving unemployment assistance than previously estimated. Furthermore, roughly 270,000 layoffs announced through March this year represent the highest quarterly total since 2009, excluding the pandemic period.

Fed's Challenge: Labor Market Slack and Inflation Reduction

For the Fed, the relationship between labor market slack and reduced inflation may depend on the specific areas and pace of job growth deceleration. New research from the Kansas City Fed implies that this connection could be more complex than anticipated, as service sector industries driving wage growth and inflation are least sensitive to changes in monetary policy.

Rate Increase Impacts on Service Industries

While industries such as manufacturing and the home building may follow established patterns as the Fed raises interest rates, leading to more expensive credit and a slowdown in demand and employment, service industries, which account for the majority of US economic output, are more labor-intensive and less sensitive to rate hikes. This insight comes from Kansas City Fed economists Karlye Dilts Stedman and Emily Pollard.