The employment report of the American economy published last Friday rose slightly above preliminary estimates, when it indicated an addition of 263 thousand jobs in September, compared to an early expectation of 255 thousand jobs. The report did point to a moderation in the growth rate of the labor market, but when you calculate the trend going forward it appears that only in a year the number of open jobs will return to more normal levels, and this is probably what led to the sharp declines in Wall Street on Friday. In light of the surprising drop in the unemployment rate from 3.7% to 3.5%, it seems that the Fed will have no choice but to continue raising interest rates.
In light of this, it seems that the only thing that will prevent another interest rate increase of 0.75% at the November Fed meeting is a drop in the consumer price index that will be published on Thursday (3:30 p.m. Israel time). In the meantime, the earnings report season is starting these days, and it seems that apart from the energy companies, the expectations regarding the other sectors are not encouraging. The glass is half full is that the balance sheet of the companies is positive and that the consumer continues to show resilience, but on the other hand, the significant strengthening of the dollar in recent months is expected to bite into the profitability of the international corporations. The fear of a global recession may also reduce demand in the international market for goods and products from the United States.
The markets are now pricing in interest rate increases at a total rate of 1.25% in the fourth quarter and another quarter of a percent in the first quarter of 2023. In the near term, inflation data will have a major impact on the market, and this is because the Fed’s moves are derived from it. If there are indications of inflation moderation, the markets may react positively. On the other hand, if inflation continues to establish and stabilize, this will lead to an increase in interest rate expectations and burden the markets.
**The writer is the Chief Economist of Global X**