The Federal Reserve spent the summer waiting for the labor market to give it a reason to sit still. On Thursday, the labor market declined again.
Initial claims for state unemployment benefits fell by 1,000 to a seasonally adjusted 206,000 for the week ended September 5, the Labor Department reported. Economists had forecast 205,000, and the prior week was revised to 207,000. The four-week moving average, which smooths out the weekly noise, also eased to roughly 206,000.
Continuing claims — filings by people drawing benefits for at least two straight weeks — came in at 1.774 million, down 1,000 from the prior week's revised 1.775 million and about 6,000 below the 1.78 million consensus. That is the measure economists watch for evidence that laid-off workers are struggling to find new jobs. It is not showing any.
A Range That Refuses to Break
Claims have been hemmed into a narrow 189,000 to 212,000 band since mid-July, consistent with a labor market that has steadied after wobbling from late spring through much of the summer. Over the past year, weekly filings have mostly stayed inside a historically low 200,000 to 230,000 range. Layoffs, in short, remain rare.
That matters because the case for the Fed holding rates at 3.50% to 3.75% next week has rested largely on the argument that the labor market is fragile enough to do the central bank's disinflation work for it. Fed Governor Christopher Waller has said he would be inclined to leave the benchmark rate unchanged if inflation progress continues. Chair Kevin Warsh has taken the other side, saying the Fed still has "work to do" on inflation.
The data keeps landing on Warsh's side of the table. August payrolls came in at 162,000, far above forecasts. Claims are flat to lower. Neither number describes an economy that needs protecting from a quarter-point increase.
Oil Above $100 Complicates the Arithmetic
Energy is doing the Fed no favors either. Crude futures traded at $101.97 a barrel Thursday morning, with Brent quoted around $101.25 — the first move above $101 since May, driven by escalating naval incidents involving U.S. and Iranian vessels. Thursday's producer price report showed why that matters: wholesale energy prices jumped 4.2% in August, with diesel alone up 24.1%.
Gold has gone quiet in the middle of it. December futures opened at $4,448 per troy ounce, down 0.3% from Wednesday, and changed hands near $4,439.70 in early trading, holding a narrow band around $4,400 for most of the week. The metal is still up 2.6% on the month and 22.7% from a year ago.
Equities entered Thursday on the back foot. The Dow closed Wednesday down 405.41 points, or 0.8%, at 52,380.66. The S&P 500 lost 37.16 points, or 0.5%, to 7,636.36, and the Nasdaq Composite shed 168.07 points, or 0.6%, to 26,253.34.
Friday Is the Whole Ballgame
Following Thursday's producer price release, traders lifted the odds of a quarter-point hike at the September 15-16 meeting to more than 73%, according to CME Group's FedWatch tool.
The August Consumer Price Index lands Friday at 8:30 a.m. Eastern. Headline prices are expected to rise about 0.4% on the month, with annual estimates clustered around 3.3% to 3.4%. The number that decides the meeting is core. The median forecast among 17 economists surveyed by The Wall Street Journal is 0.22%, with every estimate falling between 0.16% and 0.24% — all of it rounding to 0.2%, which would pull annual core inflation to 2.4% from 2.5%.
A 0.2% core print gives the doves something to hold onto. A 0.3% almost certainly does not. With claims at 206,000 and crude above $100, the margin for a soft reading has gotten very thin.
Sources: U.S. Department of Labor via Reuters and the Associated Press (jobless claims); CME Group FedWatch (rate-hike odds); Yahoo Finance (gold and crude prices); Trading Economics (Brent crude); The Wall Street Journal economist survey and CNBC (CPI forecasts); CNBC (equity closes, PPI detail).