A deluge of data hit the markets last week capped off by a Federal Reserve Open Market Committee meeting that drew the most attention. Chair Jerome Powell and the FOMC unanimously determined to hold rates at last week’s meeting, noting they “will carefully assess incoming data, the evolving outlook, and the balance of risks” when deciding the next policy move. At the following press conference, Chair Powell effectively ruled out further policy tightening; but signaled the Committee would not reduce interest rates until it has “greater confidence” inflation is headed towards the 2% target. Markets responded accordingly by pricing in one full rate cut for 2024 and even that might seem aggressive given the recent data trend.
The most meaningful change from meeting to meeting was related to the Fed’s balance sheet. The FOMC will slow the pace of its balance sheet roll-off by $35 billion, down to $25 billion per month, starting in June. While a modest change, this will tighten financial conditions on the margin. Overall, markets breathed a sigh of relief there was not a more hawkish pivot and reacted positively. The S&P 500 traded higher by 0.6%, while the Bloomberg US Aggregate Bond Index increased 1.2% as rates fell across the curve.
US Labor Market Downshifts: Job Growth Moderates While Unemployment Rises to 3.9%
Change in Payrolls
Source: Bloomberg, Bureau of Labor Statistics. As of April 30, 2024.
Apart from the Fed meeting, it was a busy week for labor market reports. Here is a quick recap of the data points released:
- The employment cost index, a closely tracked monitor of wages and labor market strength, posted a 1.2% increase quarter-over-quarter on Tuesday, ahead of expectations for 1.0% growth and the highest in a year. The gauge illustrates wage inflation remained persistent in the first quarter, contributing to broader CPI.
- ADP released its Employment Change measure that tracks private payrolls on Wednesday. The report showed companies added 192K jobs in April, beating expectations for 183K. The prior month was also revised higher to 208k, up from 184k. The back-to-back gains are the largest since the middle of 2022 and were broad-based across industry and geographic regions. The report also showed wage growth is slowing but remains elevated compared to historical averages.
- On Wednesday, the Bureau of Labor Statistics (BLS) showed job openings fell to 8.5M in March, the lowest level in three years and down from 8.8M in February. The decline largely came from interest rate-sensitive sectors such as real estate, construction, and financing activities. The quits rate also ticked down to the lowest since August 2020, showing workers are less confident of finding a new job quickly.
- The BLS reported on Thursday that US unit labor costs increased in the first quarter as wages increased and productivity gains slowed. A potential double whammy for the Fed, rising input costs and lower productivity runs counter to a normalizing labor market. This corroborates earlier reports that suggest employers are set to slow hiring in favor of productivity enhancing investments.
- Jobless claims held steady around 210k new and 1.7M ongoing claims according to a Thursday report from the Department of Labor—yet hiring has ticked down in recent weeks.
- Finally, the big jobs report on Friday from the BLS showed a trifecta for the Fed and investors more broadly – slowing job growth, higher unemployment rate, and lower wage inflation. April marked the slowest labor market growth since October with 175k jobs added. Job growth slowed within leisure and hospitality, construction, government, automakers, and temporary-help providers. Gains remain concentrated in health care, transportation, and retail trade. Furthermore, annual wage gains slowed to 3.9%, the first time the measure has broken below 4% since June 2021. While there was resilience in the labor market in Q1, the April report shows significant cooling, suggesting tighter policy lagged effects are beginning to take hold. One time does not make a trend, but the Fed will hope this marks a turning point for labor market normalization and the knock-on impact to inflation. Investors cheered the news.
Q1 2024 Earnings Are Showing Positive Results—Best Annual Increase Since Q2 ‘22
Earnings Growth: Realized vs Expected
Source: Bloomberg. As of May 4, 2024.
While several updates touched on the labor market, corporate earnings continue to show largely positive results. Another 35% of S&P companies published quarterly results last week, bringing the total to over 80% reported. Most companies are showing good results, but several CEOs noted a cautious tone for future growth.
– Written by Eric Schmitz, CFA