Despite the Ukraine crisis phenomenon that preceded the economic data, the indicators to be revealed by the US employment report at the end of the first week of the month will reveal how much the tight labor market supports the Fed's trend. The data, which will allow central banks to evaluate economic trends before the Ukraine conflict, is also important in that it allows numerical analysis of the potential effects of the crisis on the economy. We have seen the Omicron economic impact recover from the worst, as economic growth turned out to be both modest and short-lived in the US and Europe. But now, a regional war is looming that will expose the entire world to high commodity inflation and potential economic slowdown. Persistent supply constraints, both in terms of raw material supply problems and labor shortages, may not only shrink manufacturing output but also lead to upward price pressures exacerbated by rising energy prices.

 

If we look at the expectations regarding the employment increase in February; 415K employment growth, 3.9% unemployment rate and average hourly earnings growth of 0.5% on a monthly basis and 5.8% on an annual basis are expected. Despite the fact that the number of Covid cases peaked during the employment report survey week, we observed a solid increase of 467K last month. Employment gains are broad-based, while the continued improvement in the unemployment rate despite the increasing need for work indicates a tightening labor market. A significant part of the losses that occurred during the pandemic were also recovered.

 

Now; Despite the Omicron cases, now that state-based fiscal buffers have been withdrawn, households have to return to work for a permanent income. This is of course good news in terms of labor supply shortages. However, real wages are still negative against inflation. The melting of the accumulated savings effect and the fact that inflation will increase even more after the last Ukraine war, especially by oil and food, reveals the high salary bargain. Therefore, employers still have to bear higher personnel costs and this is reflected in the goods and services sold. The current political risk balances may bring wage inflation to a situation that will contribute more to general inflation.

 

Within the framework of this trend, it is expected that US employment will exceed pre-pandemic levels and the unemployment rate will be close to full employment by the end of the year. Of course, it is important to what extent the Fed tightens its monetary policy this year, as well as to what extent. The Fed could still consider supporting the economy if the phenomenon of price stability could be achieved. But there is a lot of worrying news in the world, from the Russia-Ukraine conflict to very high inflation. The Fed provides some protection from the tightening labor market, and a strong gain in February will ensure that they do not hold back from the March rate hike. The probability of 50 basis points decreased with the effect of the last crisis, the Fed will start with the traditional band and will be dependent to data and economic outlook.

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