MARKET TRENDS: Labor Market Recovery Slows; IMF Trims Growth Estimates

Last week, applications for U.S. unemployment insurance benefits touched its highest level since February. This indicates a slight slowdown in the recovery of the labor market.

The rise in new claims was in sharp contrast to market expectations of a decline. Initial jobless claims rose 15,000 to a seasonally adjusted 297,000 for the week ending on July 4, the Labor Department said on Thursday. Market estimates expected new applications to fall to 275,000 last week.

Despite such an increase in claims, it was the 18th consecutive week that new filings were below 300,000. Thus, the numbers are still reflective of a firming labor market.

The previous week’s claims were revised to 282,000, up 1,000 from the initially reported 281,000 additional claims. The four-week moving average of claims, a better measure of labor market trends as it reduces week-to-week volatility, rose 4,500 to 279,500 last week. The July claims data tends to be volatile because of retooling by auto plants during that period.

Continued claims, indicating the number of people still claiming jobless benefits after an initial week of aid, rose 69,000 to 2.334 mn in the week ended June 27, stated the Labor Department. A government report last week showed employers added 223,000 jobs in June, while the unemployment rate slipped to 5.3%. The labor market has been tightening, with the unemployment rate forecasted at a 5.0% to 5.2% range, which most Federal Reserve officials consider consistent with full employment.

Meanwhile, the International Monetary Fund (IMF) has slashed its forecast for global growth this year due to a weaker first quarter in the U.S., and the financial-market turbulence in China and Greece. The world economy is likely to grow 3.3% in 2015, down from the previous estimate of 3.5% projected in April and slower than the 3.4% expansion last year, said the IMF in its revisions to its World Economic Outlook released on Thursday.

Growth expectations in 2016 remain unchanged at 3.8%. The decline in global growth outlook was led by the U.S., which is expected to grow at 2.5% this year, compared with 3.1% in April. The IMF is recommending the Fed hold off on any interest rate hike until the first half of 2016, when wage and price inflation are expected to pick up.

Earlier on Wednesday, the minutes released from the June Fed Open Market Committee revealed yet another delay in short-term interest rate hikes. The Fed officials were dovish in their most recent discussions about monetary policy, while they lay grounds for future rate hikes.

The economy is showing mixed signals this year. Although new jobs were created, inflation remains soft. The Gross Domestic Product contracted 0.2% in the first quarter, manufacturing lagged and housing indicators were mixed.

The Fed acknowledged an improving U.S. economy, but is unsure about an exit from the zero interest rates policy that began in late 2008. The majority of the Fed members gave non achievement of full employment and inflation below 2% as reasons for the delay.

The Fed wants to see further evidence of a strengthening economy and labor markets, as well as inflation moving back toward the Committee’s objective. Additionally, there are concerns about Greece, which is moving toward a full debt default and exit from the eurozone.

After the committee’s minutes were released, government bond yields edged lower. The market reaction was muted, which reflects sentiments from a meeting prior to Greece rejecting an austerity referendum and before a sharp selloff in Chinese stocks.

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