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U.S. labor market: Resilience and economic signals, January 18, 2024

U.S. labor market: Resilience and economic signals

Published every Thursday, the data from the U.S. labor market, made public on a weekly basis, has demonstrated positive trends. This release is part of a series of recent data sets that, at least for the time being, underscore the resilience of the world's largest economy in the face of the highest interest rates seen in two decades.

The Department of Labor reported that the number of individuals filing for unemployment benefits for the first time in the previous week in the U.S. stood at 187,000. This figure marks one of the lowest readings since the fall of 2022. Notably, these figures surpass expectations, indicating a more robust labor market than initially forecasted.

Economists had anticipated new jobless claims to be around 205,000, slightly up from the 203,000 reported in the preceding week (revised upward by a marginal 1,000).

For the week ending January 6, the number of individuals continuing to receive unemployment benefits amounted to 1.806 million. Analysts had expected this figure to be 1.843 million, slightly down from the previously reported 1.832 million (with a minor downward revision from 1.834 million).

These data collectively suggest that the job market remains robust, and the unemployment rate is not on an upward trajectory. From these findings, it can be inferred that the overall health of the U.S. economy, while experiencing a slowdown in activity, remains in good condition and is steadfastly defending against the recession that has been anticipated for the past year. Additionally, positive data on retail sales and neutral figures on industrial production were reported on the preceding Wednesday.

However, amidst the positive indicators, there are also signals that suggest potential inconsistencies and a looming slowdown in the strength of the U.S. economy. Illustratively, regional business activity indices published by the Federal Reserve show mixed results.

On Thursday, it was reported that the Philadelphia Fed manufacturing activity index for January had shown a slight increase to -10.6 points from -12.8 points the previous month. Nevertheless, the data from the previous month were revised downward (from the initial 10.5 points), and analysts had expected the January reading to improve to -6.7 points. Earlier in the week, it was revealed that the manufacturing activity index in the state of New York fell by a substantial 29 points to -43.7 points in January, marking the lowest reading since May 2020.

Despite these inconsistencies, the market interprets the latest data sets as confirmation of the U.S. economy's resilience against a potential recession. This implies that the Federal Reserve will have more flexibility, compared to a downturn in economic conditions, to maintain high-interest rates for an extended period.

The current interest rate range has remained unchanged since August, standing at 5.25-5.50 percent. In the ongoing cycle, initiated in March 2022, the Fed has raised rates by a cumulative total of 5.25 percentage points. Notably, recent market sentiments had anticipated aggressive rate cuts as early as March, with a cumulative decrease of 1.25-1.50 percentage points throughout the year based on prior assumptions.

However, the probability of a 0.25 percentage point cut in March has now diminished to 55 percent, indicating a strong divergence in market assessments (according to data from the CME Fed Watch Tool). Presently, there is a nearly certain expectation of a rate cut in May, possibly even by 0.50 percentage points. Scenarios projecting a 0.50 and 0.75 percentage points reduction in June are assigned probabilities of 45 percent.

In the currency market, the EUR/USD exchange rate is experiencing a 0.2 percent decline but is still maintaining levels above 1.086.


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