The Fed’s interest rate hikes did manage to lower inflation from 9.1% in the summer to below 6%, but the central bank knows that the path to the inflation target is through damage to the labor market, for which we have not seen any indication until this week. On Tuesday, the number of new jobs opened in the month of February in the US was published, with the figure being the lowest since the summer of 2021. In the month of February, 9.93 million new jobs were opened and in the month before that of 10.82 million jobs, the analysts’ expectation for February was 10.4 million jobs.
Today the number of new claims for unemployment benefits for the last week were published and they also continued the trend of weakening the labor market – 228 thousand claims compared to an expected 200 thousand claims. This is the second week in a row that the number of claims exceeds expectations – which has not been seen since mid-October.
The unemployment rate in the US in the last year is below 4%, with the lowest point recorded in January – 3.4%, below expectations. In February, there was an increase and the figure stood at 3.6%, while the expectation was that there would be no change from the previous month. The expectation for the figure of one month March that will be published tomorrow is for 3.6%, but if it records a figure higher than the estimates again, one that continues the trend of the last week – the Fed and the market may be able to get some certainty about the effect of the central bank’s steps.
Towards the end of last month, the Federal Reserve raised the interest rate in the US by another 0.25% to a level between 4.75% and 5%. In light of the banking crisis, about two weeks before the decision, investors were much more divided about whether the interest rate would indeed rise in that decision, and future expectations speak of the Fed returning In the end, he will lower the interest rate this year. Accumulation of data indicating that will be key regarding the Fed’s next interest rate decision in less than a month.
The current estimates in the market regarding the change in the interest rate at the next meeting are equally divided between leaving the interest rate unchanged and raising it by only 0.25%, until a month ago the expectation was for a 0.5% increase with a 35% probability and a 0.5% increase with a 60% probability.
The expectations for the interest rate at the end of the year indicate an interest rate in the range between 4% and 4.25% with a probability of 38%, an interest rate in the range between 4.25% and 4.5% with a probability of 25.7% and an interest rate in the range of 3.75%-4% with a probability of 23.2%. Investors give a chance of only 1.2% that we will see the interest rate stay at its current range at the end of the year and 0.1% for it to be 0.25% higher than that.
The bottom line – the market is certain that there is no chance that the interest rate will remain at the current level for a long time, either due to further bank collapses or as a result of the unemployment figures being “positive” enough for the Fed. If indeed the unemployment rate tomorrow surprises higher, we may see the market pricing in the fact that the interest rate will be even lower at the end of the year. We will see the market reaction to the publication of the unemployment rate only next week due to the Easter holiday.
Until now investors were happy to see data showing that the labor market is weak because they understood that this means that the Fed is closer to lowering interest rates (what investors want to see), this time the story is a little different. Investors now understand that the possibility of a significant recession is on the table and not necessarily a “soft landing” which will actually hurt stocks. The current pricing for the future interest rate does not actually indicate that the Fed will lower the interest rate because inflation has calmed down and reached the target range (the purpose for which they started raising the interest rate in the first place), but that the Fed will lower the interest rate because the economy simply will not be able to meet these conditions.
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