T. Rowe Price: Preview Non Farm Payroll/Unemployment data

March 10, 2023

Labour market data released this week have taken unusual importance after Powell’s testimony to Congress.

Job vacancies fell slightly in January, but from a high (and an upwardly revised) level. The number of vacancies per unemployment workers at 1.9 is close to the 2022 peak and indicates continued tightness in the labor market.

Recently Blerina Uruci, US economist at T. Rowe Price, has highlighted the quits rate: a decline would be consistent with workers being more concerned about their ability to find jobs. This measure fell for the third consecutive month suggesting some softening in confidence, although the hiring rate is stable and has not deteriorated further.

In addition, the February ADP employment report beat expectations and January was revised higher slightly. A reminder that the ADP data no longer try to replicate the payroll methodology and apple-to-apple comparisons are not possible. But it does provide one more data point that suggests activity and the labor market continued to be in solid footing in February.

Moreover, claims for the first week of March rose slightly but are at historical lows, which suggests labor market tightness remains. There is a question here about when/if tech lay-offs will start to show up in the data and it seems increasingly that if it does happen it should be post Q1.

Finally, there was a further chunky increase in job cuts in February according to the Challenger survey, with about a quarter of them coming from the Tech sector. But there were layoffs in healthcare. This would suggest that claims data will increase in the coming weeks. Hiring intentions have also fallen significantly in the challenger survey but this tends to be an even noisier signal. 

Implications for the Fed

Uruci's working assumption post the February press conference had been that the bar would be very high for the Fed to re-introduce 50bp hikes given their policy strategy had shifted to a slower pace of tightening. I thought the Fed needed more confirming evidence than would be available by its March meeting.

Powell’s message from the Congress hearings this week indicates the bar is lower and it seems the chair wanted the market to take the possibility of a 50bp hike in the near term more seriously. It is also important that this message came through very strongly in the written statement, it shows a deliberate attempt to manage expectations about near term policy moves.

Powell was also asked directly about the March meeting at the start of his second testimony. He did not push back on the possibility of a 50bp hike in March. He highlighted JOLTS, Payrolls, CPI and PPI data as important information before the FOMC makes up their mind about the outcome of that meeting. He mentioned the effect of seasonal noise on the employment data, but also pointed to most economic indicators pointing in the direction of broadly based improvements in the economy. I think this was a hawkish answer.

What does this mean for pricing beyond March?

Uruci thinks that once we shift to 50bp, it is very likely that it become the new pace for the next couple of meetings which would get us to 5.75% by the May meeting (not July). In this case the new terminal rate would be at or somewhat higher than 6% in my view, but of course we would need to clear the debt ceiling issues to get there. A 50bp hike in March should also come with a bigger revision to the 2023 dots in the summary of economic projections, but the number of cuts for 2024 will likely stay unchanged.