Tag: NFP

Blowout U.S. Jobs Report Keeps Fed on Hawkish Path, For Now

Posted on by slightbourne@noblecapitalmarkets.com

The red-hot U.S. labor market showed no signs of cooling in March, with employers adding a whopping 303,000 new jobs last month while the unemployment rate fell to 3.8%. The much stronger-than-expected employment gains provide further evidence of the economy’s resilience even in the face of the Federal Reserve’s aggressive interest rate hikes over the past year.

The blockbuster jobs number reported by the Bureau of Labor Statistics on Friday handily exceeded economists’ consensus estimate of 214,000. It marked a sizeable acceleration from February’s solid 207,000 job additions and landed squarely above the 203,000 average over the past year.

Details within the report were equally impressive. The labor force participation rate ticked up to 62.7% as more Americans entered the workforce, while average hourly earnings rose a healthy 0.3% over the previous month. On an annualized basis, wage growth cooled slightly to 4.1% but remains elevated compared to pre-pandemic norms.

Investors closely watch employment costs for signs that stubbornly high inflation may be becoming entrenched. If wage pressures remain too hot, it could force the Fed to keep interest rates restrictive for longer as inflation proves difficult to tame.

“The March employment report definitively shows inflation remains a threat, and the Fed’s work is not done yet,” said EconomicGrizzly chief economist Jeremy Hill. “Cooler wage gains are a step in the right direction, but the central bank remains well behind the curve when it comes to getting inflation under control.”

From a markets perspective, the report prompted traders to dial back expectations for an imminent Fed rate cut. Prior to the data, traders were pricing in around a 60% chance of the first rate reduction coming as soon as June. However, those odds fell to 55% following the jobs numbers, signaling many now see cuts being pushed back to late 2024.

Fed chair Jerome Powell sounded relatively hawkish in comments earlier this week, referring to the labor market as “strong but rebalancing” and indicating more progress is needed on inflation before contemplating rate cuts. While the central bank welcomes a gradual softening of labor conditions, an outright collapse is viewed as unnecessarily painful for the economy.

If job gains stay heated but wage growth continues moderating, the Fed may feel emboldened to start cutting rates in the second half of 2024. A resilient labor market accompanied by cooler inflation pressures is the so-called “soft landing” scenario policymakers are aiming for as they attempt to tame inflation without tipping the economy into recession.

Sector details showed broad-based strength in March’s employment figures. Healthcare led the way by adding 72,000 positions, followed by 71,000 new government jobs. The construction industry saw an encouraging 39,000 hires, double its average monthly pace over the past year. Leisure & hospitality and retail also posted healthy employment increases.

The labor market’s persistent strength comes even as overall economic growth appears to be downshifting. GDP rose just 0.9% on an annualized basis in the final quarter of 2023 after expanding 2.6% in Q3, indicating deceleration amid the Fed’s rate hiking campaign.

While consumers have remained largely resilient thanks to a robust labor market, business investment has taken a hit from higher borrowing costs. This divergence could ultimately lead to payroll reductions in corporate America should profits come under further pressure.

For now, however, the U.S. labor force is flexing its muscles even as economic storm clouds gather. How long employment can defy the Fed’s rate hikes remains to be seen, but March’s outsized jobs report should keep policymakers on a hawkish path over the next few months.

Job Growth Exceeds Expectations, but Raises Questions on Economy’s Path

Posted on by slightbourne@noblecapitalmarkets.com

The U.S. labor market turned in another solid performance in February, adding 275,000 new jobs and keeping the unemployment rate near historic lows. However, mixed signals within the employment report raised more questions than answers about the strength of the economy and the Federal Reserve’s next policy moves.

The 275,000 increase in non-farm payrolls topped economists’ expectations of 198,000 and showed hiring picked up after January’s downwardly revised 229,000 gain. The unemployment rate ticked higher to 3.9%, as more Americans entered the labor force but couldn’t immediately find jobs.

While the headline job growth was robust, details within the report revealed some potential red flags. Revisions slashed 167,000 jobs off the initially reported totals for December and January, indicating the labor market wasn’t quite as sturdy late last year as originally thought.

Additionally, wage growth is moderating after a strong run in 2022. Average hourly earnings rose just 0.1% for the month, undershooting forecasts, and are up 4.3% over the past year versus 4.5% year-over-year in January. Slower wage growth could ease inflation pressures but also signals softer labor demand.

“This jobs report has something for everyone in terms of economic narratives,” said Liz Ann Sonders, chief investment strategist at Charles Schwab. “You can view it as evidence the economy is weakening and a recession could be coming, or that it’s a Goldilocks scenario with solid growth and contained inflation.”

The details were undeniably mixed. Full-time jobs decreased, while part-time positions increased. And while the unemployment rate rose, measures of labor force participation also ticked higher, indicating workers are returning from the sidelines.

Industry hiring patterns reinforced the muddy economic picture. Healthcare companies led with 67,000 new jobs last month, while the government added 52,000 positions. Those stable healthcare and public sector gains were offset by disappointments in interest-rate sensitive areas like construction (23,000) and manufacturing, which saw a decline.

The spending side of the economy showed signs of life, with restaurants/bars adding 42,000 jobs and retailers hiring 19,000. But some of those consumer-facing gains could simply reflect volatility after January’s weather disruptions.

From an investing standpoint, the conflicting data raises uncertainty around the Fed’s rate path and the probability of a recession arriving in the next 12-18 months. Prior to the release, markets had priced in the Fed’s first rate cut in March based on signs of economic slowing.

However, the February jobs figures, combined with recent hawkish Fed rhetoric, shifted rate cut expectations to June or even July. Traders now see around 4 quarter-point cuts this year, down from upwards of 6-7 cuts priced in previously.

Dan North, senior economist at Allianz Trade Americas, said the nuanced report likely “doesn’t change the narrative” for the Fed in the near-term. “We’re still growing jobs at a good pace, and wages, while elevated, have come down a bit,” he said. “The Fed has more wood to chop, but the path towards easier policy is still visible on the horizon.”

For equity investors, the employment crosscurrents create a murky outlook that will require close monitoring of upcoming data points. On one hand, continued job creation supports consumer spending and Corporate America’s ability to preserve profit margins through the year.

The risk is that the Fed overtightens policy, doesn’t cut rates quickly enough, and the still-resilient labor market tips into contraction. That could increase recession odds and put downward pressure on revenue and earnings forecasts.

When job reports deliver contradictory signals, the prudent investment strategy is to prepare for multiple scenarios. Building defensive portfolio positions and rebalancing asset allocations can provide insulation if economic conditions deteriorate faster than expected. At the same time, holding core positions in quality companies can allow for participation if solid labor markets translate into better-than-feared growth.

Mixed economic data opens the door to increased market volatility. And in that environment, disciplined investing, active management, and opportunistic portfolio adjustments often become critical drivers of long-term returns.