JOLTS Job report shows slowdown in labor market - What's to come for the NFP?

U.S. job postings fell by 384,000 to 9.6 million in the most recent report for March 2023, according to the US Bureau of Labour Statistics published yesterday on the 2nd of May. The lowest reading since April 2021 was below the market's forecast of 9.775 million, and suggests that finally a possible softening of the labor market is on the way for the United States.

In the meantime, the FOMC began its two-day monetary policy meeting, where it’s expected that it will hand down another interest rate rise from 4.75%-5% up to 5%-5.25% later on today.

The Federal Reserve in determining how it sets interest rates, constantly monitors the Job Openings and Labor Turnover Survey News Release (JOLTS report) for indications of labor slack. This is despite the fact that the data set lags the nonfarm payrolls statistic by a month.

A lower figure means less pressure on wages, which is generally good for inflation and may reduce pressure on the FOMC to keep increasing interest rates.

The Fed should find some solace in the incremental decline of this ratio, but today’s rate rise is likely to be a surety in any case. The vast majority of economists polled by Reuters (94 out of 105) believe the FOMC members will decide to raise its main policy rate by 25 basis points to the 5.00%-5.25% range during their meeting this week, as inflation is still high.

More on the JOLTS numbers
New hires were stable at 6.15 million and quits crept down to 3.85 million from 3.98 million in the most recent Job Openings and Labour Turnover Survey, while layoffs rose by roughly 250,000 to 1.8 million, the highest level since December 2020.

Employment opportunities fell by 144,000 in transportation, storage, and utilities last month, while they rose by 28,000 in educational services.

The construction sector had the highest increase in layoffs in March, suggesting the Fed's aggressive rate-hiking campaign has dampened demand in the housing market. However, layoffs in the construction industry have been slow to follow because of the large number of outstanding projects that have accumulated since the COVID-19 pandemic.

Companies in the high-growth technology sector, which expanded as consumers' habits evolved during the pandemic lockdowns, have been the most vocal about laying off workers in recent months. These include Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOGL), Meta, Microsoft (NASDAQ:MSFT) and IBM (NYSE:IBM), among many others that have sacked many thousands of workers. However, companies in a variety of industries, including banking, media, retail, and manufacturing, have all reduced staffing levels this year too.

What to expect from the NFP report on Friday
After significant employment growth in the first two months of the year due to exceptionally mild weather and seasonal factors, the US economy produced 236,000 new jobs in the previous report for March, the lowest monthly total since December 2020, below predictions of 239,000.

The number still indicated a robust labor market at the time, notwithstanding a recent slowdown in hiring as the economy gradually returns to normal after the pandemic shocks and as high borrowing rates and prices compel businesses to reduce expenses.

Highlights from last month include government jobs growth of 47,000, professional and commercial services at 39,000, health care at 34,000 jobs, and leisure and hospitality growth of 72,000, which includes food services and drinking establishments.

According to estimates compiled by Refinitiv, economists anticipate a modest increase in employment of 179,000 in April and a rise in the unemployment rate to 3.6% from 3.5% in March. Average hourly earnings are also expected to remain stable for April, at 0.3% month over month and 4.2% year over year.

Stay tuned for these latest reports as they are due to be released by the Bureau of Labour Statistics at 12:30 PM GMT. Let’s now have a look at the best way to take advantage of the NFP report.

How to trade the NFP report
In a previous report, we explained that there were different key figures to monitor within the NFP report, especially those that are particularly important for the Fed, meaning the overall number of jobs created, the unemployment rate, as well as the average earnings.

This data can offer valuable insights into the state of the American economy, including trends in employment, growth, and inflation, which can help FOMC members in determining whether adjustments to their monetary policy are necessary.

The NFP report can be traded in the short term due to the high volatility it triggers in the Forex, bond, and indices markets upon its release.

Traders can take advantage of this volatility by entering the market before the report if they have a directional bias, or after the report if the numbers either confirm or go against market expectations.

In the end, the market's response to the NFP report is influenced by both the anticipated numbers and the trend observed in previous months. Moreover, it's worth noting that reactions to the report figures can be illogical at times, whereby negative news can result in positive outcomes and vice versa.

For investors who focus more on long-term strategies, the NFP report can provide valuable insights into the potential long-term impact of a new monetary policy cycle on various asset classes.

By taking into account a longer-term perspective, investors can confirm the current trend or identify a potential shift in monetary policy direction and identify assets that may benefit from changes in interest rates, depending on their specific scenario (higher interest rates, lower interest rates, or a pause in interest rate hikes).