Fed, Turning Off Tightening Signal... US Employment Slows and Growth Rate Downgraded

Private Employment Increased by 177,000... Half of Last Month
Employment Contraction, Signal of Economic Soft Landing
Q2 Growth Rate Revised Down from 2.4% to 2.1%

Amid expectations of additional tightening in the United States, signs of cooling in the overheated labor market, one of the inflation factors, have been observed. The U.S. Gross Domestic Product (GDP) growth rate also showed signs of slowing, strengthening expectations for the end of the Federal Reserve's (Fed) tightening. Recently, Fed Chair Jerome Powell stated that the interest rate decision next month would be based on data, spreading market expectations for a rate hold.

On the 30th (local time), private employment in August, compiled by U.S. private employment information firm ADP, increased by 177,000 compared to the previous month. This is much lower than the previous month (371,000, revised) and below market expectations (200,000). The employment market, which peaked in June (497,000), appears to be cooling faster than expected.

Similar trends were seen in the labor department's employment statistics released the day before. According to the Department of Labor's Job Openings and Labor Turnover Survey (JOLTS), private sector job openings in July were 8.8 million, down 338,000 (5.3%) from the previous month. This is the lowest since March 2021 (8.4 million) and significantly below market expectations (9.5 million).

Recently, the Fed has been tightening on the grounds of inflation and a strong labor market. Although the Fed rapidly raised the benchmark interest rate from near zero to 5.25-5.5% over the past year and a half, the overheating signs in the labor market have not subsided. The strength of the labor market is a concern for the Fed, which acts as a fireman for inflation, as it could increase wage-driven inflationary pressures.

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The revised GDP growth rate for the U.S. in the second quarter of this year was also lowered from 2.4% to 2.1% (annualized quarter-on-quarter). Wall Street analysts interpreted this as the Fed's aggressive tightening policy impacting the real economy. Despite the high interest rate environment in the second half of this year, economic indicators have been trending upward, raising the possibility of further Fed tightening. However, with the GDP growth rate declining, expectations for the end of tightening are spreading. Fed Chair Jerome Powell, at last week's Jackson Hole meeting, left open the possibility of further rate hikes but stated he would "carefully decide on hikes or holds based on data."

According to the Chicago Mercantile Exchange (CME) FedWatch, the federal funds futures market on the morning of the same day expected an 88.5% chance that the Fed would hold the benchmark interest rate at 5.25-5.5% at the Federal Open Market Committee (FOMC) meeting on September 14. This is higher than the previous day (86.0%) and a month ago (80.0%).

U.S. Treasury yields are also falling. As of 4:46 p.m. on the same day, the 10-year U.S. Treasury yield was 4.107%, down 1.5 basis points (1bp=0.01%) from the previous trading day.

On expectations for the end of tightening, the three major New York stock indices showed gains. The Dow Jones Industrial Average closed at 34,890.24, up 0.11% from the previous trading day; the S&P 500 rose 0.38% to 4,514.87; and the Nasdaq increased 0.54% to 14,019.31.

Sonu Bagess, Global Macro Strategist at Carson Group, said, "This is a classic case where 'bad news' becomes 'good news,' as the slowdown in economic indicators reduced upward pressure on (bond) yields and helped stock prices rise."

The market is closely watching the Personal Consumption Expenditures (PCE) price index to be released on the 31st. The PCE price index is one of the inflation indicators closely monitored by the Fed, and attention is focused on whether it will cement expectations for the end of tightening. Attention is also on the nonfarm payroll employment data to be released on the 1st of next month. Quincy Crosby, Chief Global Strategist at LPL Financial, said, "As next month approaches, the market wants to see follow-up indicators showing movements like those seen today."

This content was produced with the assistance of AI translation services.