Unemployment Claims on the Rise, Minimally

The number of Americans filing new applications for unemployment benefits increased marginally last week, suggesting that layoffs remained low even as the labor market is slowing.

Other data from the Labor Department showed producer prices rising slightly more than expected in August amid a rebound in the cost of services. The combination of a fairly stable labor market and still-high inflation further diminished the chances of the Federal Reserve cutting interest rates by 50 basis points next Wednesday, when the U.S. central bank is expected to start its long-awaited easing cycle.

The reports followed data this month showing the unemployment rate retreated in August from a near three-year high touched in July and underlying inflation indicating some stickiness last month. Financial markets have slashed the odds of a half-point rate reduction to less than 15 percent.

“Producer prices are not too hot and the employment markets are not deteriorating too much either, so there is probably no need for Fed officials to surprise the markets with a bigger- than-expected 50 basis points rate cut next week,” said Christopher Rupkey, chief economist at FWDBONDS.

Initial claims for state unemployment benefits rose 2,000 to a seasonally adjusted 230,000 for the week ended Sept. 7. Economists polled by Reuters had forecast 230,000 claims for the latest week. Last week’s data included the Labor Day holiday.

Claims tend to be volatile around public holidays. They have, however, been little changed since dropping from an 11-month high of 250,000 in late July.

Unadjusted claims decreased 12,968 to 177,663 last week, led by substantial declines in California, Georgia, Michigan, Ohio and New York. No state reported increases in claims above 1,000.

The slowdown in the labor market is being driven by businesses scaling back on hiring as higher borrowing costs curb demand throughout the economy. Government data last week showed nonfarm payrolls increasing by less than expected in August but the unemployment rate falling to 4.2 percent from 4.3 percent in July.

Rate Cut

Financial markets saw a roughly 13 percent probability of a 50 basis points rate cut at the Fed’s Sept. 17-18 policy meeting, CME Group’s FedWatch Tool showed. The odds of a 25 basis point rate reduction are at about 87 percent.

The central bank has maintained its benchmark overnight interest rate in the current 5.25 percent to 5.50 percent range for a year, having raised it by 525 basis points in 2022 and 2023.

Stocks on Wall Street were mixed. The dollar fell against the euro. The European Central Bank cut interest rates on Thursday, but offered few clues on its next move. U.S. Treasury yields were little changed.

The number of people receiving benefits after an initial week of aid, a proxy for hiring, increased 5,000 to a seasonally adjusted 1.850 million during the week ending Aug. 31, the claims report showed. The so-called continuing claims could decrease in the coming weeks after schools in Minnesota reopened for the new school year in September.

Non-teaching staff in the state are allowed to file for unemployment benefits during the summer school holidays, to which economists attributed the surge in continuing claims in July to levels last seen in late 2021.

The drop in continuing claims through much of August is consistent with the decline in the unemployment rate last month.

With the labor market cooling, the threat of inflation heating up is minimal.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci)