The number of Americans filing new claims for unemployment benefits fell to a five-month low last week, but stock markets reacted in line with a “good news is bad news” paradigm and resumed their sharp selloff as the strong labor market data suggests the Federal Reserve is likely to stay the course on hiking rates aggressively to fight inflation.
The jobless claims data beat market forecasts, which called for 215,000 filings.
“That’s *10* straight weeks of initial jobless claims undershooting the consensus. Maybe the Street has been underestimating the strength of the labor market?” said Ian Shepherdson, Chief Economist at Pantheon Macroeconomics, in a statement.
Some analysts saw the strong jobs data as confirmation that a Fed pivot is less likely and the central bank would press ahead with its aggressive tightening cycle to tame soaring inflation.
“Good news is bad news for Wall Street,” he added, noting that all three major Wall Street stock indexes continued to sell off sharply following the jobless claims data release.
Fed Looking to Dent Demand
The drop in jobless claims raises the possibility that the unemployment rate might tick down. A tightening labor market poses a dilemma for the Fed, which is trying to cool the economy to bring down inflation.Federal Reserve Chair Jerome Powell recently told markets that there’s no “painless” way to bring down inflation and warned there could be more than just a “relatively modest” rise in unemployment as the central bank tightens aggressively to dent demand.
“The Fed won’t be slowing the pace of their rate hikes yet with 75 basis points in November and 50 basis points more in December a virtual certainty,” said Christopher Rupkey, chief economist at FWDBONDS in New York.
“The Fed is going to go until something breaks, but so far, nothing is breaking besides the stock market and early signs that home prices are starting to fall,” he added.
The Fed has raised its median forecast for the unemployment rate this year to 3.8 percent from its earlier projection of 3.7 percent in June. The central bank also boosted its unemployment rate estimate for 2023 to 4.4 percent from the 3.9 percent projected in June.