EURUSD is moving in the Descending triangle pattern and the market has reached the lower high area of the pattern
The employment situation in the United States is closely monitored by analysts and investors as it serves as a key indicator of the country’s economic health. The release of the June official employment report is eagerly awaited, and market consensus suggests an increase of 200,000 in payrolls. However, recent data on jobless claims has raised concerns, leading experts to predict a potential decline in job creation for the month. This article examines the factors contributing to this outlook and discusses the potential implications for the economy.
I. Current Employment Landscape
A. Strong May Employment Report
In May, the US experienced a robust rise in nonfarm payrolls, with a gain of 339,000 jobs. This figure initially appeared positive, but a deeper analysis revealed concerning aspects of the labor market. The household survey data indicated a contraction of 310,000 in employment, contributing to an increase in the unemployment rate to 3.7%. This divergence between nonfarm payrolls and household employment signaled a gradual softening of the labor market.
B. Gradual Softening of the Labor Market
1. Subsiding Demand for Workers
The demand for workers has been gradually subsiding, indicating a potential slowdown in job creation. Initial jobless claims have been increasing between survey weeks, suggesting that employers are becoming more cautious in hiring new employees.
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2. Increase in Initial Jobless Claims
The four-week average of initial jobless claims has risen by nearly 20% over the past year. This rise indicates a potential decrease in employment opportunities and may be an early indicator of a cooling job market.
3. Decline in Job Postings
Job postings in June continued to slide, pointing to a decrease in available job opportunities. This decline further supports the notion of a cooling labor market.
II. Forecast for June Job Creation
A. Wells Fargo’s Analysis
Wells Fargo analysts have forecasted a gain of 245,000 new jobs for June, reflecting a more optimistic outlook compared to the market consensus. Despite the potential decline in job creation, this figure still indicates a robust gain.
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However, analysts are closely monitoring revisions to May’s data due to the survey response rate being at a 22-year low. Any significant revisions could alter the perception of the labor market’s strength.
B. Potential Impact on Unemployment Rate
1.Anticipated Decrease to 3.6%
While the unemployment rate increased in May, there is an expectation that it will tick back down to 3.6% in June. This projection is based on the anticipation of a bounce-back in the household measure of employment, which is likely to improve.
2.Expectations of a Rebound in Household Employment
Despite the contraction in household employment in May, analysts anticipate a rebound in June. This expected improvement is a crucial factor in the projection of a decrease in the unemployment rate.
III. The Federal Reserve’s Stance
A. Two Potential Rate Increases
The Federal Reserve has indicated a possibility of two more rate increases this year. However, surprises in the job market could influence the Fed’s decision-making process.
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The market’s attention is particularly focused on the employment data to gauge the likelihood of rate adjustments.
B. Economist Ellen Zentner’s View
Economist Ellen Zentner warns of a significant slowdown in monthly nonfarm payroll growth, falling below the 90,000 replacement rate in the fourth quarter of 2023. Zentner’s forecast suggests a bottoming out of job growth in January 2024, with only 40,000 new jobs created before a gradual improvement to 72,000 per month in 2024. Zentner even raises the possibility of the first negative headline payrolls figure for this cycle occurring in September. This significant slowdown in job creation could have profound implications for the economy and financial markets.
1.Forecasting a Significant Slowdown in Job Growth
Zentner’s analysis suggests that job growth in the United States will experience a notable deceleration. Falling below the 90,000 replacement rate indicates a weakening labor market, which may result in reduced employment opportunities and increased unemployment.
2.Possibility of a Negative Headline Payrolls Figure
Zentner’s forecast raises the possibility of a negative headline payrolls figure, which would mark a significant departure from the average pace of job creation seen earlier in the year.
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A negative jobs report could have adverse effects on market sentiment and potentially fuel concerns of a recession, particularly when combined with the Federal Reserve’s focus on fighting inflation.
3.Market Reaction and Risk-Off Sentiment
Zentner suggests that the markets would unlikely respond positively to a negative headline jobs number. Investors may quickly shift their attention to renewed fears of a recession, driven by the perception of an inflation-fighting Federal Reserve. Risk-off sentiment could soar in financial markets, reflecting a cautious approach from investors who remain vigilant about the possibility of an economic downturn, despite the narrative of a soft landing.
C. Fed’s Response to a Drop in Jobs
1.Caution Against Quick Rate Cuts
In the event of a drop in jobs, Zentner cautions against expecting swift rate cuts from the Federal Reserve. While the labor market’s health is a crucial consideration for monetary policy decisions, the Fed must also balance concerns of inflationary pressures. Consequently, the Fed may exercise caution and evaluate the broader economic indicators before implementing any rate adjustments.
2.Balancing Inflation Concerns with Employment Data
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The Federal Reserve faces the challenge of maintaining a delicate balance between addressing potential weaknesses in the job market and managing inflation. A drop in jobs could signal economic vulnerabilities, but the Fed may still prioritize controlling inflation, considering it a significant threat to the overall economic stability. As a result, their response to a decline in jobs might be measured and deliberate.
Conclusion:
The upcoming release of the June official employment report in the United States is highly anticipated, as it provides essential insights into the health of the labor market and the overall economy. Despite initial expectations of moderate job creation, recent data on jobless claims raises concerns about a potential decline in job growth for the month. The subsiding demand for workers, increased initial jobless claims, and declining job postings indicate a gradual softening of the labor market. Economists’ forecasts, such as Wells Fargo’s expectation of a gain of 245,000 jobs, offer insights into the market’s sentiments.
However, economist Ellen Zentner warns of a significant slowdown in job growth, with the possibility of a negative headline payrolls figure. Such a development could have adverse effects on market sentiment, potentially triggering risk-off sentiment and renewed fears of a recession. The Federal Reserve, with its focus on inflation and potential rate increases, might approach a drop in jobs cautiously, balancing the need to address labor market weaknesses with concerns of rising inflation.
As the June employment report is released, market participants will closely analyze the data to assess the state of the US labor market and its broader implications for the economy. The outcome will provide valuable insights into the trajectory of job creation and its impact on various stakeholders, including investors, policymakers, and the general public.
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