In a clear sign of the cooling of the labor market, American employers created only 175,000 jobs in April, according to the Bureau of Labor Statistics. reported Friday. That’s down from March’s revised figure of 315,000 and well below economists’ consensus estimate of 240,000 jobs. Furthermore, the unemployment rate increased slightly, to 3.9%, compared to 3.8% in March.
That’s not a good sign if you’re looking for a job, but Wall Street investors — and likely Jerome Powell — find the news encouraging. This is proof that the Federal Reserve Chairman’s policies are working as intended. As George Mateyo, chief investment officer at Key Wealth, explains, the latest jobs report was “exactly what the Fed chairman wanted.”
“Today’s jobs report came in weaker than expected, marking the first significant ‘bearish surprise’ in more than two years. Still, the weakness was not so small as to suggest that the labor market is turning around,” Mateyo said. Fortune by email. “This was a slowdown that the Fed and many market participants had wanted for some time.”
A blow to the stagflation narrative
Since the Fed began raising interest rates to tame inflation in March 2022, Powell and company had hoped the labor market would calm down, allowing inflation to sustainably return to its 2% target. But three hot swellings reports and signs of continued wage pressures spooked investors in the first quarter, leading some to fear stagflation – the toxic economic combination of high inflation and little or no growth – could be on the menu. This meant that the threat of “higher and longer” interest rates was still there, weighing on markets.
But Powell rebuked stagflation fears at the Federal Open Market Committee (FOMC) press conference on Wednesday, saying he didn’t see the impact of stagflation. “deer” or “-flation” economic data that worries investors. And now the latest jobs report has provided strong evidence to support this view.
Take the example of wage growth. A key to stagnation theory is the idea that persistent wage growth will prevent inflation from falling back toward the Fed’s 2% target, which in turn could force the central bank to maintain higher interest rates for longer, which would weigh on economic growth. . When it’s March employment cost index was released on April 30 and shows that Americans’ wages increased by 4.4% compared to last year. That was well above the level Powell seeks for wage growth to be what he calls “consistent” with a 2% inflation economy.
But the latest jobs report shows the average hourly wage rose just 0.2% month over month to $34.75 in April, and up 3.9% from Last year. These figures were both below consensus estimates and down from 0.3% and 4.1% in March. This is a good sign for the Fed’s fight against inflation – and for investors who feared the return of stagflation.
“For those grappling with renewed fears of stagflation, this jobs report confirms what Powell said earlier this week, that there would be no ‘stag’ or ‘-flation ” For now. Strong employment gains, lower wage pressures,” said Elyse Ausenbaugh, head of investment strategy at JPMorgan Wealth Management. Fortune by email.
Investors’ positive outlook after the latest jobs report was highlighted by the markets’ rise on Friday. THE Dow Jones Industrial Average, the S&P 500 and the Nasdaq all jumped more than 1% by midday.
“Markets fear that economic growth is too strong and that progress on inflation is blocked. This report leans the other way, which makes the stock and bond markets very happy,” said David Donabedian, chief investment officer of CIBC Private Wealth US. Fortune by email. “Weaker job growth (but still growth) and slower wage growth are a near-perfect combination for markets. »
According to Donabedian, although wage growth declined and the U.S. economy added fewer jobs in April, overall job gains remained substantial and widespread. More than 60% of all sectors reported job gains for the month. The largest gains were in health care (56,000), social assistance (31,000), and transportation and warehousing (22,000).
Should we expect interest rates to fall by the fall?
It may seem counterintuitive for investors to celebrate a slowing labor market, but the prospect of market-boosting interest rate cuts is reason enough for many to feel optimistic.
Nationwide Chief Economist Kathy Bostjancic explained that bond market investors now expect a 25 basis point rate cut in September, after rising inflation and economic resilience led them to pushing back their rate cut forecasts earlier this year.
“If inflation slows in the coming months, we also view September as the possible start of monetary easing, but the inflation numbers will set the tone for the Fed,” she said. Fortune.
Ronald Temple, chief market strategist at Lazard, believes investors’ expectations for rate cuts have also been “brought forward” due to recent labor market data. “Today’s jobs report, combined with data on job openings and departures, all point to an easing of tensions in the labor market, which should translate into reduced pressures on wages and inflation, opening the door to rate cuts as early as the September FOMC meeting,” he said. Fortune by email.
