The Strategist

Cheering the weaker US labour market

After a choppy April in which capital markets became increasingly concerned about a "higher for much longerscenario for interest rates, Friday’s "goldilocks" jobs report provided a welcome respite from rising inflation concerns. While the results were below expectations - thereby somewhat alleviating interest rate concerns and driving a rally in equity and bond markets - the report itself provided a solid reading, reflecting weakening, yet, resilient employment dynamics and thus, solid private demand in the world’s biggest economy. 

Tina Jessop, Senior Economist, LGT Private Banking
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10 minutes
US Arbeitsmarktbericht
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The April US labour market report: weaker but not weak

The US economy created 175,000 new non-farm payrolls for the month of April. This was below consensus expectations of 240,000 and reflects a slowdown from the average monthly pace of 250,000 new jobs observed over the previous twelve months. Signs of cooling were also evident in the unemployment rate which rose from 3.8% to 3.9% and the decline in hours worked per week. Looking beyond April’s payroll figures, other employment data paint a similar picture: job openings are falling, the number of people voluntarily leaving jobs is slowing, part-time work is increasing, corporate hiring intentions are easing and by most measures, wage growth is moderating. 

However, while headline figures have weakened, job growth remains at a healthy clip in absolute terms, with 40 consecutive months of positive job creation and well above the 75,000 to 100,000 job gains needed to keep pace with the growth of the US labour force. All in all, the employment backdrop points to a more balanced economy, coming off an above-average GDP growth rate and extremely tight labour market conditions.

Putting the labour market into the context of last week’s Fed decision 

Against the backdrop of the sharp increase in interest rates over the past two years, the resilience of the US labour market has been remarkable. It should come as no surprise that labour market dynamics are finally moderating. This turning of the tide helps explain the rather dovish stance adopted by the Federal Reserve at last week’s Federal Open Markets Committee (FOMC) meeting. Slowing growth and easing labour market dynamics allow the Fed to place greater emphasis on its second mandate: full employment.

Leaving the Fed Funds rate unchanged at a range of 5.25-5.5%, Fed-Chairman Jerome Powell ruled out the possibility of rate hikes, emphasising that current policy conditions are restrictive; and that they are restrictive enough to bring inflation back to target. This comes despite the recent flare-up in inflationary momentum that took place over the course of the first quarter of 2024. 

The volatile period of post-pandemic normalisation makes forecasting and policymaking incredibly difficult. In the current environment, the Fed is as dependent on data as it is on broader market perceptions. This explains the sharp swings in market pricing for the Fed’s future policy rate path. We expect this volatility to remain elevated in the coming weeks. 

The LGT perspective

We started the year on the hawkish side. In January, when the market was pricing in six to seven interest rate cuts over the course of 2024, we were anticipating three to four cuts. In recent weeks, market expectations have zigzagged between one to two rate cuts, depending on the latest data release. 

The weaker US labour market data was a welcome respite from rising inflation concerns. We still expect core inflation (i.e. excluding energy and food prices) to trend downwards from current levels, but at a slow and uneven pace, as wage growth eases and the contribution from shelter inflation (housing prices) wanes. Rising commodity prices and a premature easing of financial conditions pose risks to our outlook.

The period between now and the FOMC meeting on 31 July will bring three more inflation and two jobs reports and more insight into the depth and breadth of the US labour market weakening. Until we gain more clarity on these factors, we maintain our forecast of two to three rate cuts by end 2024, with the risks tilted to two cuts.

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