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U.S. stocks hit their highest in more than two months as a key jobs report fell short of market expectations, raising hopes that investors could expect interest rate cuts later this year.
U.S. payrolls rose by 175,000 in April, well below the 241,000 predicted by a Bloomberg survey and the smallest increase in six months.
The blue-chip S&P 500 rose 1.3% as the labor market cooled, with Federal Reserve Chairman Jay Powell vowing that interest rates would remain at a 23-year high of 5.25% to 5.5% for even longer. I ended the week by hinting that I would. It was expected.
Investors were relieved that Chairman Powell also said that the next rate hike is “unlikely.” A rate hike was thought to be unlikely, but some strong inflation statistics have brought the possibility of a rate hike back into investor discussion.
Futures market traders reacted to Friday's jobs report by moving forward their expectations for the Fed's first interest rate cut from November to September.
Their initial belief has waned in subsequent trading, but about 70% of bets still suggested rates would be cut after the Fed's September meeting, according to CME's FedWatch tool. Futures markets are pricing in almost two quarterly point rate cuts this year.
The yield on two-year U.S. Treasuries, which fluctuates in line with interest rate expectations, fell 0.07 percentage points to 4.81% in late afternoon trading on Wall Street, shortly after hitting a one-month low. It fell by 0.16 percentage points. The report has been published.
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The U.S. unemployment rate rose slightly to 3.9%, compared to expectations of 3.8%.
Revised data for February and March shows 22,000 fewer jobs were created than previously reported. The slowdown in job creation was most pronounced in leisure and services, construction, and government, while employment remained strong in health care and retail.
The report also showed a slight decline in average weekly working hours and slower revenue growth.
“We had a record or near-record warm winter, which may have given job growth a little bit of a boost, but it's now back on trend,” said Paul Ashworth, chief North American economist at Capital Economics. “But this has definitely led the market to think that cutting rates may not be an option, because not only is job growth slowing, but average hourly wages are also quite low.”
Michael Feroli, JPMorgan's chief U.S. economist, maintained his expectation that the first interest rate cut would be in July following the “welcome” jobs report. “The market has not moved yet, but I think the Fed will be willing to withdraw some of its policy restraints if the next two jobs reports show that labor market activity continues to cool,” he said. Ta.
The Fed's next actions will likely depend on inflation data, given concerns that even as the labor market cools, inflation is not falling as quickly as officials hope. “The inflation numbers will drive the Fed's decision,” said Kathy Bojancic, chief economist at Nationwide.
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But the numbers likely weaken the argument that the Fed could be forced to raise rates further to quell the overheating economy, which should come as a relief to the U.S. central bank.
“This employment report remains very strong. We don't see many signs of cracks in the labor market,” said Ryan Sweet, chief U.S. economist at Oxford Economics. “Overall, this is what the Fed is hoping for: Either job growth slows and the job market cools a little bit, or it simply rebalances.”
But Veronica Clark, an economist at CitiUS, said she was “a little concerned” that Friday's report was the “first sign” that the labor market could slow. She said: “Recruitment rates are falling, working hours are decreasing, and part-time, precarious work is increasing. All of this indicates that companies are looking to reduce labor costs.”
With less than six months until the U.S. election, President Joe Biden said the data was another sign of the resilience of the economy on his watch. “America's great resurgence continues,” he said in his statement.
“When I took office, I inherited an economy on the brink of the worst economic crisis in 100 years. I had a plan to rebuild this country and build the economy from the middle down to the top. Now we are seeing that plan in action.”
