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US stocks enjoyed their best day in more than two months after a critical jobs report undershot expectations, bolstering hopes that investors could look forward to interest rate cuts later in the year.
The US added 175,000 jobs in April, well below the 241,000 forecast in a Bloomberg poll and the smallest rise for six months.
The cooling labour market spurred a 1.3 per cent gain for the blue-chip S&P 500 index, ending a week in which Federal Reserve chair Jay Powell signalled that rates would remain at a 23-year high of 5.25-5.5 per cent for even longer than anticipated.
Investors were relieved that Powell also said that it was “unlikely” the next move in rates would be higher. While rate increases had been considered unlikely, the prospect had returned to investors’ discussions after several sets of strong inflation data.
Futures market traders responded to Friday’s jobs report by bringing forward expectations for the Fed’s first rate cut to September, from November.
Although their initial conviction faded in later trading, about 70 per cent of bets still implied that rates would be lower after the Fed’s September meeting, according to the CME’s FedWatch tool. Almost two quarter-point cuts this year are now priced in by the futures market.
The two-year Treasury yield, which moves with interest rate expectations, was down 0.07 percentage points at 4.81 per cent in late-afternoon trading on Wall Street, but had been down as much as 0.16 percentage points at a one-month low shortly after the report was released.
US unemployment rose slightly to 3.9 per cent, compared with estimates of 3.8 per cent.
Revisions to data for February and March showed that 22,000 fewer jobs were created than previously reported. The slowdown in job creation was most pronounced in leisure and hospitality, construction and the government sector, while employment remained strong in healthcare and retailing.
The report also showed average weekly hours worked edged lower and earnings growth was soft.
“It was a record, or near record, warm winter, which might have boosted employment growth a bit, and now we’re returning to trend,” said Paul Ashworth, chief North America economist at Capital Economics. “But this definitely gets the market thinking that rate cuts might not be off the table — because it’s not just a slowdown in employment growth, you’ve also got pretty weak average hourly earnings.”
Michael Feroli, chief US economist at JPMorgan, held to his forecast of a first cut in July after the “welcome” jobs data. “The market is not there but we believe that if the next two job reports show continued cooling in labour market activity, then the Fed will be comfortable taking back some of its policy restraint,” he said.
Even with the labour market cooling, the Fed’s next steps will be driven more by inflation data, given concerns that it has not been coming down as rapidly as hoped by officials. “The inflation readings will call the tune for the Fed,” said Kathy Bostjancic, chief economist at Nationwide.
However, the figures will probably dampen any discussion that the Fed may be forced to raise rates further to stamp out an overheating economy, which will be a relief for the US central bank.
“This is still a very strong jobs report — there’s not a lot of indication that there are cracks forming in the labour market,” said Ryan Sweet, chief US economist at Oxford Economics. “Overall, this is what the Fed has been wanting to see: softening in job growth, and the job market cooling a little bit or just rebalancing.”
However, Citi US economist Veronica Clark said she was “a bit worried” about Friday’s report being the “first sign” the labour market could be slowing down. “The hiring rate is falling, hours worked are coming down and part-time, unstable work is rising. All these signs that businesses are looking to cut labour costs.”
With less than six months before the US election, President Joe Biden described the data as another sign of the resilient economy under his watch. “The great American comeback continues,” he said in a statement.
“When I took office, I inherited an economy on the brink, with the worst economic crisis in a century. I had a plan to turn our country around and build our economy from the middle out and the bottom up. Now we are seeing that plan in action.”
