Weekly Market Perspectives: Mixed labor figures intensifies Fed pressure

Published: June 10, 2024

It was a pivotal jobs week on Wall Street, with data painting a mixed picture. Investors continued to be pulled in different directions when viewing economic data – is bad news still good? In other words, will recent data support a normalizing economy, paving the way for lower rates or does the bad news point to tougher times ahead? The balance will be difficult to strike for Fed Officials hoping to achieve slower inflation while maintaining economic growth. Investors will get a better sense of where Fed Chair Jerome Powell sits after this week’s FOMC meeting, which follows the May CPI report. Ultimately, investors viewed the labor data as largely positive and pushed the major indices higher for the week. The S&P 500 Index ended higher by 1.4%, and the US Aggregate Bond Index increased 0.4% after long-term rates moved lower.

US Job Opening Fall Further: Vacancies Declined to Three-Year Low
US Job Openings vs Ratio of Unemployed Workers

Source: Bloomberg, Bureau of Labor Statistics

The Job Openings and Labor Turnover Survey (JOLTS) kicked off the labor reports on Wednesday, revealing a significant drop in US job openings. According to the Bureau of Labor Statistics, job openings fell to 8.1 million in April, the lowest level in over three years, from a revised 8.4 million in March. The figure was below all economist estimates, while the ratio to unemployed workers fell to 1.2—the lowest since June 2021. The sharpest declines in job vacancies were seen across health care, hospitality, manufacturing, government jobs, and food services. The data suggests a gradual cooling of the labor market, characterized by slowing hiring rather than job cuts . For now, the economy has balanced bringing down inflation without triggering widespread layoffs.

Employment Growth Exceeded All Projections
Change in nonfarm payrolls (MoM)

Source: Bloomberg, Bureau of Labor Statistics

Up next, the ADP private payrolls report added 152k jobs in May, well below the 175k predicted. April’s numbers were also revised lower by 4k jobs. The report further enhanced the narrative that the labor market is slowing, prompting investors to price in earlier interest rate cuts.

On Friday, the BLS released its main labor market report, revealing the US economy added 272k jobs in May—well ahead of expectations for 180k jobs. While May was stronger than expected, April figures were revised lower by 10k, and March figures lower by 5k. Hiring was mostly concentrated in health care (86k), government (43k), leisure and hospitality (42k) and professional services (32k). Of note, the unemployment rate rose to 4.0%, up from 3.9%, as more workers became unemployed (157k). Despite this, initial and continuing unemployment claims remain range-bound near 220k and 1.8M, respectively. On the wage front, average hourly earnings climbed 0.4% from April and 4.1% from a year ago, suggesting income gains remain robust. Under the surface of a strong headline figure, a mixed bag of data suggests a resilient labor market that should support economic growth but may also keep upward pressure on prices.

Hawkish Repricing: Fed Swaps Price First Rate Cut for December

Source: Bloomberg, Federal Reserve.

Following Friday’s labor market data, investors adjusted their expectations, reducing the likelihood of interest rate cuts in 2024. While no rate cuts are expected at the next several Fed meetings, the probability for the first full rate cut is expected at the December meeting with a coin flip chance that gets pulled forward to the September meeting. Markets have regularly mispriced rate expectations relative to the Fed, so this is subject to change quickly, especially if inflation remains sticky. Investors will get an update on monetary policy and inflation this week.

– Written by Eric Schmitz, CFA