U.S. labor market tightening; inflation pressures muted

The number of Americans filing applications for jobless benefits tumbled to near a 49-year low last week, which could ease concerns about a slowdown in the labour market and economy.

Other data on Thursday showed import prices dropping by the most in more than three years in November as the cost of petroleum products tumbled and a strong dollar weighed on prices of other goods, pointing to subdued imported inflation.

Tightening labour market conditions bolster expectations that the Federal Reserve will raise interest rates at its Dec. 18-19 policy meeting. With inflation likely to remain tame through the first half of 2019, economists see fewer rate hikes next year.

The Fed has increased borrowing costs three times this year.

"Markets can breathe a sigh of relief that the economy is not going all wobbly," said Chris Rupkey, chief economist at MUFG in New York. "No inflation pressures building and a tight labour market is news that tells the Fed they are right to continue to raise interest rates at next week's meeting."

Initial claims for state unemployment benefits dropped 27,000 to a seasonally adjusted 206,000 for the week ended Dec. 8, the Labor Department said. The decline in applications, which was the largest since April 2015, was likely exaggerated by difficulties adjusting the data around this time of the year.

Claims hit 202,000 in mid-September, which was the lowest level since December 1969. Economists polled by Reuters had forecast claims falling to 225,000 in the latest week.

Claims shot up to an eight-month high of 235,000 during the week ended Nov. 24. The Labor Department said only claims for Virginia were estimated last week.

The four-week moving average of initial claims, considered a better measure of labour market trends as it irons out week-to-week volatility, fell 3,750 to 224,750 last week.

While challenges smoothing the data around the Thanksgiving holiday likely boosted applications in prior weeks, there were fears the labour market was losing momentum given financial market volatility, the fading stimulus from a $1.5 trillion tax cut package and the Trump administration's protectionist trade policy.

Last week's sharp drop in claims also suggests a slowdown in job growth in November was likely the result of worker shortages. Nonfarm payrolls increased by 155,000 jobs after surging by 237,000 in October.

"Seasonal adjustment can be challenging at this time of year, but this report should lessen fears that the labour market is weakening significantly," said Jim O'Sullivan, chief U.S. economist at High-Frequency Economics in White Plains, New York.

With the unemployment rate near a 49-year low of 3.7 per cent, Fed officials view the labour market as being at or beyond full employment.

U.S. Treasury yields were mixed as investors digested moves by the European Central Bank to reduce growth and inflation forecasts for 2019. The dollar rose slightly against a basket of currencies. U.S. stocks were trading mostly higher.

SUBDUED IMPORTED INFLATION

In a second report on Thursday, the Labor Department said import prices dropped 1.6 per cent last month, the biggest decline since August 2015, after an unrevised 0.5 per cent increase in October.

Economists had forecast import prices decreasing 0.9 per cent in November. In the 12 months through November, import prices rose 0.7 per cent. That was the smallest annual increase since November 2016 and followed a 3.3 per cent rise in October.

The report came on the heels of data showing weak overall producer and consumer inflation readings in November. It supports economists' expectations that inflation could remain moderate through the first half of 2019.

The Fed's preferred inflation measure, the core PCE price index excluding food and energy, increased 1.8 per cent on a year-on-year basis in October, the smallest gain since February, after rising 1.9 per cent in the prior month.

It hit the U.S. central bank's 2 per cent target in March for the first time since April 2012. Most economists expect the Fed will raise interest rates twice next year, although traders expect no more than one rate increase.

Last month, prices for imported fuels and lubricants tumbled 11.0 per cent after rising 3.2 per cent in October. Prices for imported petroleum plunged 12.1 per cent, the biggest drop since January 2016, after increasing 2.7 per cent in October.

Oil prices have fallen by a third since the start of October amid concerns about oversupply and a slowing global economy.

Food prices declined 2.2 per cent in November, reversing October's 2.2 per cent gain. Excluding fuels and food, import prices fell 0.2 per cent last month after being unchanged in October. The so-called core import prices rose 0.4 per cent in the 12 months through November.

The weak core import price readings reflect the strong dollar, which has gained about 8.0 per cent this year against the currencies of the United States' main trade partners.

The import price data excludes tariffs, which economists say could understate any inflationary impact of the White House's trade war with China. The price of goods imported from China fell 0.1 per cent in November.

"To the extent that tariffs are borne by foreign producers through narrower profit margins, we would see a drop in import prices even as U.S. consumers and producers are paying more for imported goods," said John Ryding, chief economist at RDQ Economics in New York.

(With inputs from agencies.)