Financial News for the Week of December 8th, 2023

The major focus on the U.S. economic data calendar this week was the labor market, with the two main reports showing labor demand and supply are gradually coming back into better balance. The service sector also continued to expand while U.S Treasury yields continued to push further below their mid-October highs.

First up, the more backward-looking JOLTS data showed that the number of job openings in October fell by more than expected and slipped to the lowest level since March 2021. Although still higher than before the pandemic, at 8.7 million, openings are down notably from a record high of 12 million in March 2022. To be sure, there were still plenty of jobs available relative to the more than 6.5 million unemployed job seekers in October. However, the gap has narrowed with the vacancies-to-unemployed ratio falling to 1.34 from 1.47 in September — its lowest reading since August 2021. Other elements of the report also supported a softening labor market narrative – lay-offs held steady at 1.6 million and the quit rate remained unchanged at 2.3% for the fourth consecutive month (in-line with where it was immediately prior to the pandemic). Further evidence of labor demand cooling has been seen in continuing jobless claims, which have ticked higher over the past month, suggesting workers are finding it a bit harder to find a new job.

The signal from the more recent November payrolls report was generally in line with the JOLTS data in financial news. The economy added 199k jobs in November, largely in line with its pre-pandemic average and up from 150k the previous month (Chart 2). The unemployment rate dipped to 3.7% as the labor force participation rate edged higher. Annual wage growth held constant at 4.0%, down from the highs seen last year, but still above what’s consistent with 2% inflation.

The recent cooling in the labor market alongside easing inflationary pressures has pushed term yields notably lower as market participants have pulled forward the timing of when the Fed could begin cutting rates. Since their recent peak in October, yields have retreated closer to levels seen in September. Given the resilience of the economy thus far however, a further easing in financial conditions could provide a stimulus to demand that could reignite price pressures and prompt further Fed action contrary to market expectations.

On the production side, the services sector of the economy managed to eke out a continued expansion with the ISM services index rising modestly to 52.7 in November. The lackluster growth suggests that activity in the sector is slowing down, which could help to keep a lid on service sector inflation and help wage inflation continue to cool.

The resilient labor market that supported an unexpectedly strong U.S. economy this year is showing signs of cooling. The latest signs that it is coming back into greater balance will be welcomed at the Fed, which will be meeting next week for their final policy decision of the year. When Fed Chair Powell noted that the central bank can “let the data reveal the appropriate path”, this week’s data points to a steady course. All eyes will be on next week’s CPI release to see if it corroborates that plan of action.

 

Shernette McLeod, Economist | 416-415-0413