As Recovery Accelerates, Employment Focus Becomes Sharper

As the economy continues to recover, market participants will concentrate on two critical areas: the employment picture and policy decisions made by the Federal Reserve. Let’s take a closer look at each of these to understand what is driving Federal Reserve policy decisions and, more importantly, what to look for in future economic releases.

Much like what was seen in the commodity markets, labor experienced disruptions in both supply and demand simultaneously. As the economy begins to normalize, the demand for labor has outpaced the supply of available workers. This unbalanced employment picture should start seeing signs of improvement with two major events directly affecting the situation:

• The end of enhanced unemployment benefits has directly competed with open positions in the labor force. In some of the 26 states that have chosen to opt-out of enhanced federal unemployment benefits, unemployment rates have dropped to near pre-pandemic levels. Job openings have fallen, and new jobs are being filled.
• The opening of schools in the fall, allowing parents the ability to leave without worrying about unsupervised education for children. The reopening of childcare and preschool programs, which are essential for the children and families they serve, becomes a major catalyst for workers returning to the labor force. Interruptions in childcare services during the pandemic have caused conflicts for working parents that resulted in high absenteeism in workplaces.

Both of these changes should start to rebalance the jobs market in the near future.

Surrounding the entire jobs question are the actions being taken by the Federal Reserve. The Fed will start to taper at some point, and the capital markets should be ready. When it does happen, we should see the yield curve steepen and the U.S. dollar gets stronger against other major global currencies. One of the ancillary effects might be downside pressure on commodity prices, which are dollar-denominated, and could create disinflationary pressure.

Ultimately, the market direction will be determined by the velocity of any tightening that takes place. If the Fed finds itself behind the curve, and inflation starts to edge up and become “sticky,” then it might have to move faster than expected. If, on the other hand, they move too fast, then disinflationary pressure can become a problem again which will force the Fed to move gradually with rate hikes.           

Either way, the jobs picture, and Fed decisions could create volatility for commodities, stocks, and bonds in the months ahead.