US employment data is sparking debate among investors about whether the labor market has suffered permanent, pandemic-related scars
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The September Non-Farm Payroll report raises questions among some investors as to whether the U.S. labor market has suffered permanent pandemic-related scars that could keep inflation high, potentially forcing market participants and policymakers to adjust their expectations.
The so-called participation rate, or the percentage of people of working age who have or are looking for a job, has barely changed over the past month at 61.6% – suggesting that millions of Americans are still sidelined. The rate has remained in a tight range since last June, despite the economy reopening, and is 1.7 percentage points lower than it was in February 2020 when the pandemic hit the US
This is important because last month unemployment benefits ended for millions of Americans, an event that still wasn’t enough to get many people back into work. Meanwhile, the average hourly wage rose in September as companies struggled to pull people off the sidelines. Rising wages are one reason inflation could stay high longer, while forcing financial markets and policymakers to rethink their economic outlook and interest rate expectations, investors say.
“There is no doubt that labor markets are scarred, but the extent of permanent scarring has yet to be seen,” said Matt Peden, director of investments at American Beacon Advisors in Irving, Texas. “On average, work makes up a large part of a company’s overall cost structure, so the wage increase will most likely be passed on to consumers to maintain margins – which is inflationary.”
“The Federal Reserve will have to monitor the situation closely as wage inflation is more permanent than temporary,” wrote Peden, whose firm had assets of $ 75.2 billion under management, in an email to MarketWatch in June. “Depending on the level of wage inflation, this could put more pressure on their ‘longer-lower’ interest rate strategy.
Financial markets struggled to interpret Friday’s job report, which reflected a much weaker-than-expected 194,000 job creation, but the unemployment rate fell to 4.8% and payrolls up from the previous months, giving investors at least some hope. Shortly after the September non-farm payroll report was released early Friday, markets collapsed, with U.S. stock indices, bond futures, and the U.S. dollar index DXY, all swaying -0.12% in troubled trading .
Read: Dow is shaky as its September job report shows 194,000 gain as people drop out of the job market
“The market and the Fed are adjusting to higher inflation normalities and a workforce that is struggling to gain a foothold from here,” said Rob Daly, director of fixed income at Glenmede Investment Management, over the phone. “I don’t think we have a guide from the past as to how this will be resolved in the present, but these structural changes will take absolutely longer.”
“While the headline numbers weren’t looking good, the revisions were pretty good,” said Daly, a Philadelphia-based $ 4.5 billion administration. However, “some structural changes are underway and it will take longer to get people back into work”.
The major stocks’ averages ended up slightly lower, with the Dow Jones Industrial Average DJIA falling -0.03% less than 0.1%, the S&P 500 Index SPX down -0.19%, and the Nasdaq Composite Index COMP – 0.51% yielded 0.5%. The dollar index fell 0.1% while government bond yields were higher.
Glenmede’s Daly says part of the reason the 10-year treasury rate TMUBMUSD10Y rose from 1.612% to over 1.6% on Friday, along with the widening of the spread between 2- and 10-year rates, was that investors are “adding a more permanent inflationary stimulus to bond yields.”
In a statement released on Friday just before the job report, Vicky Redwood, a senior economic advisor for Capital Economics based in London, said that in the year since the pandemic began, “the most immediate question has been about the permanent scars in the economy.” . “
“At least in the US, we were only too optimistic because we expected the labor supply to be available unscathed,” she wrote. “Although much of the decline in the labor force is due to transient factors (e.g.