Weekly US jobless claims at 10-month high as labor market eases; inflationary cooling

By Lucia Mutikani

WASHINGTON (Reuters) – The number of Americans filing new claims for unemployment benefits rose to a 10-month high last week, suggesting the labor market was losing momentum and keeping alive hopes of a rate cut. interest in September from the Federal Reserve.

That was reinforced by other data from the Labor Department on Thursday that showed output prices fell unexpectedly in May. The biggest drop in factory-gate prices since October followed news on Wednesday that consumer prices were unchanged in May for the first time in nearly two years.

The US central bank on Wednesday kept the key overnight interest rate in the current range of 5.25%-5.50%, where it has been since last July. Fed officials delayed the start of rate cuts until possibly December, with policymakers forecasting just a single quarter-percentage point cut this year. But economists remained optimistic that the Fed would cut borrowing costs twice this year, starting in September.

“These data open the door a little wider for the Fed to start cutting interest rates later this year,” said Bill Adams, chief economist at Comerica Bank.

Initial claims for state jobless benefits rose by 13,000 to a seasonally adjusted 242,000 for the week ended June 8, the highest level since last August, the Labor Department said.

Economists polled by Reuters had forecast 225,000 claims in the last week. It was the third straight weekly increase in claims, leading some economists to believe that cracks in the labor market were widening. Others blamed the continued volatility surrounding the Memorial Day holiday at the end of May.

The four-week moving average of claims, which sweeps out seasonal fluctuations, rose 4,750 to 227,000, the highest level in nine months. Unadjusted claims rose by 38,530 to 234,707, driven by a 10,311 increase in California. Some economists speculated that the jump could reflect layoffs after a minimum wage increase for fast-food workers in the state took effect in April.

“Initial claims have been rising for some time, but the big increase this week makes the bullish trend much harder to dismiss,” said Oliver Allen, senior US economist at Pantheon Macroeconomics.

“High long-term rates, tight credit conditions and a gradual softening of demand are beginning to weigh more heavily on businesses, and on small companies in particular.”

Stocks on Wall Street were mixed. The dollar rose against a basket of currencies. US Treasury yields fell.

SEPTEMBER STILL IN PLAY

Financial markets continued to anticipate that the Fed would begin its easing cycle in September. The Fed has raised its policy rate by 525 basis points since March 2022. The unemployment rate rose to a still relatively low 4% in May for the first time since January 2022.

Fed Chairman Jerome Powell told reporters on Wednesday that “a broad set of indicators suggests that conditions in the labor market are back to where they were on the eve of the pandemic, relatively tight but not overheated.”

The number of people receiving benefits after an initial week of aid, a proxy for employment, rose by 30,000 to a seasonally adjusted 1.820 million in the week ending June 1, the claims report showed. This was the highest reading since January for so-called continuous claims, suggesting that unemployed workers were having trouble finding new jobs.

In a separate report, the Labor Department’s Bureau of Labor Statistics said the producer price index for final demand fell 0.2% in May. This was the biggest fall in PPI since October and followed an unrevised 0.5% increase in April. Economists had predicted that the PPI would increase by 0.1%.

In the 12 months to May, PPI gained 2.2% after rising 2.3% in April.

Commodity prices fell 0.8%, with a 7.1% drop in the cost of wholesale gasoline accounting for nearly 60% of the decline. Commodity prices rose 0.4% in April. Wholesale food prices fell 0.1% while the cost of eggs fell. Excluding food and energy, commodity prices rose 0.3% after rising 0.2% in April.

The cost of services was unchanged after accelerating 0.6% in April. Transportation and storage prices fell 1.4%. Airline prices fell by 4.3%. Portfolio management fees fell 1.8%, while hotel room and weather rates fell 0.5%. But health care costs soared.

Portfolio management fees, health care, hotel and motel accommodations, insurance, and airline fees are among the components that go into the calculation of the personal consumption expenditure (PCE) price index. PCE price indices are measures of inflation tracked by the Fed for its 2% target.

The narrower PPI measure, which strips out the food, energy and trade services components, was unchanged after rising 0.5% in April. Core PPI rose 3.2% year-on-year, matching April’s gain.

Based on CPI and PPI data, economists estimated that core PCE inflation rose 0.1% in May, after rising 0.2% in April. Core inflation is expected to have increased by 2.6% on an annual basis in May, after rising 2.8% in April.

“This supports our view that the Fed will cut rates twice this year, starting in September,” said Bernard Yaros, chief US economist at Oxford Economics.

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