Labour Market Cooling, US and UK Stock Markets Benefit

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The US Labour Department recently reported an increase in new claims for unemployment benefits just before the year ended. Although alarming, the increase in unemployment could signify a decrease in inflation.

Low unemployment rates and wage growth suit the economy, but the opposite is true for markets. “Higher wages means that the central banks will push for higher inflation as companies pass on higher costs by raising the price of goods or services,” noted Nicole Goodkind, senior markets reporter for CNN.

Investors watching the labour markets as a strong market may lead the central bank to increase rates aggressively. According to Fed chair Jerome Powell, a strong job market is directly responsible for higher inflation. “There’s an imbalance in the labour market between supply and demand. Without price stability, the economy doesn’t work for anyone,” Powell added.

Just before the year ended, Wall Street and European stocks rose concerning the higher unemployment claims in the US. Initial reports released last 24 December noted that the US jobless claims were at 225,000, significantly higher than forecasted.

The increase helped Wall Street go up, with Nasdaq enjoying a 2.5 per cent increase. But traders noted that volumes were relatively thin in the final trading week of the year. According to Craig Erlam, OANDA trading platform analyst, “More broadly, equity markets are just drifting into the New Year and will continue to be choppy for the rest of the week in what I expect will be fragile trade.”

Economists hope that employment softens in the year’s first half and that the Fed quickly acts on it to strike the delicate balance between unemployment and inflation. “Employment has yet to soften notably, but I think the jobs data is likely to deteriorate meaningfully and quickly,” said Jeremy Siegel, a finance professor at The Wharton School of the University of Pennsylvania.

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