Source: Golden Ten Data
The US non-farm payrolls report for April was generally weak, and the market resumed expectations that the Federal Reserve would cut interest rates twice by 25 basis points in 2024.
The latest data released by the US Bureau of Labor Statistics on Friday showed that US employers cut their recruitment scale in April, the unemployment rate unexpectedly rose, and wage growth slowed. This indicates that the labor market is cooling down after experiencing strong growth at the beginning of the year.
After the April seasonal adjustment, the US non-farm payrolls recorded an increase of 175,000. The increase was a new low since October 2023, falling short of the forecast of 243,000 and the previous value of 303,000. The US unemployment rate unexpectedly rose to 3.9% in April, and market expectations remained unchanged at 3.8%. The average monthly hourly wage rate in the US recorded 0.2% in April, lower than expectations and the previous value of 0.3%.
The US dollar index fell by more than 50 points in the short term upon hearing the news, and spot gold rose more than $20 in the short term, once hitting the 2,320 mark. Spot silver rose by around $0.5 in the short term. US Treasury yields for most matures fell by at least 10 basis points during the day. US stock index futures climbed, S&P 500 futures rose 1.2%, Nasdaq 100 futures rose 1.5%, and Dow futures rose 0.97%.
Judging from revisions to past data, the number of new non-farm payrolls was lowered from 270,000 to 236,000 in February; the number of new non-farm payrolls increased from 303,000 to 315,000 in March. After these revisions, the total number of new jobs added in February and March decreased by 22,000 compared to before the revisions.
After the release of the non-agricultural data, US interest rate futures currently expect the Federal Reserve to cut interest rates by 25 basis points twice in 2024, compared to once before non-agricultural production. Traders have brought forward their expectations for the first time the Federal Reserve will cut interest rates from November to September.
Interpretation of Wall Street
According to some analysts, wage data is probably the most interesting data point in this non-farm payroll report. In the past three months, the average hourly wage growth rate was only 0.23%, compared to 0.4% in the previous three months. Slowing wage growth may be the driving force behind the improvement in non-housing service inflation data in the next few quarters. Since mid-2023, the Fed's preferred “supercore” service-sector inflation index (excluding housing) has been on an upward trend, which is clearly not what the Fed wants to see. In the service sector, wages account for a larger share of the cost base, so in theory, a slowdown in income should help ease price pressure in the service sector.
Analyst Chris Anstey said wage growth in the non-farm payroll report was lower than expected, which is probably the biggest problem. It should also be noted that revisions to the previous two months resulted in a cumulative reduction of 22,000 people employed. This is an overall weak report.
Richard Flynn, general manager of Carson Wealth Management, pointed out that the latest non-farm payrolls report shows that demand in the labor market is slowing down. In recent months, it has become clear that the Federal Reserve is happy to act slowly in the interest rate cut cycle and does not want the economy to weaken unexpectedly, and the report we are seeing today may lead to a shift in this practice. The collapse of the labor market may prompt the Federal Reserve to move from strolling to sprinting.
Dan Suzuki, Deputy Chief Investment Officer of Richard Bernstein Advisors, believes that this is an employment report that is quite beneficial to the market. This broadly indicates that employment growth is moderately slowing but not collapsing, which helps reduce wage pressure. Meanwhile, employment and working hours in the manufacturing sector are stable, which indicates that part of the economy continues to receive solid support.
Peter Cardillo, chief market economist at Spartan Capital Securities, also believes that the report is lukewarm and is exactly what the Federal Reserve wants to see. We have not seen a recovery in wages, companies are still creating jobs, and the economy is performing well. However, the key point of the report is wage levels, which are lower than expected by the market. This is a good report for the Federal Reserve, and a good report for the market. If we continue along this path, then this may change the timing of interest rate cuts, which may mean that interest rates will probably be cut twice this year instead of once.
Priya Misra, portfolio manager at J.P. Morgan Asset Management, said the employment data “underscores Powell's confidence that monetary policy is restrictive and that labor supply is the main driver of strong growth in non-farm payrolls in recent months.” The slowdown in employment and wage growth means a “soft landing,” she believes, “Assuming that the CPI also shows a slowdown, the August rate cut may return to the market narrative.” Looking at it now, the market expects the Federal Reserve to cut interest rates by 10 basis points at the August meeting, which is higher than the 7 basis points before the report. Therefore, it is clear that more data is needed to show the economic slowdown, especially the upcoming inflation data.
Shouldn't the market be overly optimistic?
Judging from the stock market's performance, investors are happy that the labor market is taking a big step towards a better balance; however, some analysts warned the market not to get carried away.
Ali Jaffery, an analyst at Imperial Bank of Commerce of Canada, said that what the Federal Reserve policy makers want to see is not only good data for a month, but they can feel more at ease with the inflationary pressure caused by the job market. “Overall, the labor market is still strong. After experiencing such strong employment growth, they need to see more evidence of an economic slowdown or an unexpected sharp drop in employment before they worry about their employment tasks.” Ultimately, the Federal Reserve will stand still until they have a clear understanding of inflation.
Jason Pride, head of investment strategy and research at Glenmede, points out that the 3.9% unemployment rate is not disastrous. This indicates that the economy has not declined sharply, but it certainly indicates a more relaxed labor market. The Federal Reserve is looking for reliable data to pull them out of a long-term austerity mindset. Note that labor market reports are notoriously erratic, and what we see this month may not be the same as next month. This gave the Federal Reserve some hope, but it didn't establish a trend for them.
Brian Jacobsen, chief economist at Annex Wealth Management, is worried that the danger in the labor market is that the shift from overheating to room temperature will not stop there, but will become too cold. If the Federal Reserve still intends to raise interest rates, the risk will be greater, but it patiently suspends interest rate hikes, keeping the risk of an excessive decline in the labor market at a low level.
Also, it is worth noting that the financial blogger Zero Hedge previously suggested in its forward-looking outlook that the non-agricultural sector is weakening seems to have leaked out ahead of time. According to the analysis, Yellen may have made “guarantees” with poor data when discussing this round of intervention measures with Japan to prevent them from wasting tens of billions of dollars of intervention funds. Furthermore, Powell also raised concerns about the unexpected weakening of the job market at the press conference after the interest rate decision, triggering people's expectations that they will see non-agricultural data ahead of time. He said at the time that if the labor market is weak enough, even if inflation remains stubborn, the Federal Reserve may cut interest rates.
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