US jobs growth was stronger than expected in April, showing the resilience of the economy even as the Federal Reserve signalled it was “getting close” to pausing its cycle of interest rate rises.
The US added 253,000 non-farm jobs last month, according to a report from the Bureau of Labor Statistics on Friday, confounding expectations of a slowdown.
The headline payrolls increase was partially offset by downward revisions to the previous two months’ data, but the unemployment rate and wage growth figures also pointed to continuing tightness in the labour market, raising doubts over whether the Fed will begin to cut interest rates as soon as investors had expected.
The two-year Treasury yield, which moves with interest rate expectations, jumped to session highs immediately following publication of the data. It was up 0.15 percentage points on the day at 3.94 per cent. Traders in the futures market — who prior to the report had been pricing in the possibility of interest rate cuts as soon as July — reduced those bets.
“This report paints a picture of a labour market that is hot, and that would not justify cutting rates,” said Eric Winograd, senior economist for fixed income at AllianceBernstein.
The unemployment rate dipped to 3.4 per cent last month, compared with consensus forecasts of 3.6 per cent. Hourly wage growth strengthened 0.5 per cent month on month, and was up 4.4 per cent year on year.
James Bullard, president of the St Louis Fed, said the labour market was still “very tight” and that it would take time for demand to subside.
“The rumours of the imminent demise of the economy are greatly exaggerated,” he said during an event on Friday. He added that bringing inflation down would not require a sharp rise in unemployment.
Jobs growth in April was particularly strong in professional and business services, while hiring in the healthcare and leisure and hospitality sectors also expanded strongly.
Jack Janasiewicz, a portfolio manager at Natixis Investment Managers, said hiring was strongest in areas that had suffered labour shortages for some time or were less economically sensitive, whereas growth was weaker in more interest rate-sensitive areas such as retail and manufacturing.
Wages are an important factor in inflation, particularly in the service sector, so economists and investors were closely monitoring the numbers for signs that higher interest rates were slowing the economy and bringing down inflation.
The data comes after the US central bank on Wednesday announced its 10th consecutive interest rate rise, lifting its benchmark federal funds rate to a range of 5 to 5.25 per cent. Fed chair Jay Powell said the labour market remained “extraordinarily tight”, but added that “there are some signs that supply and demand . . . are coming back into better balance”.
Data released earlier this week supported Powell’s assessment, showing a sharper than expected drop in job openings to their lowest level since April 2021. However, Friday’s figures are the latest reminder that inflationary pressures are still high.
Powell stressed on Wednesday that it would still take some time to bring inflation down towards the Fed’s 2 per cent target, but investors have been betting that the central bank will quickly pivot to cutting rates, with the first coming as soon as July.
“The labour market is still resilient — wage growth is coming down, but you could make the argument it’s not fast enough . . . It’s still a low probability, but I don’t think you can write it off and say further hikes are completely off the table,” Janasiewicz said.
Investors will scrutinise the publication of more economic reports next week to determine whether the Fed will follow through with a pause.
“They would be very foolish to push rates any higher,” said David Kelly, chief global strategist at JPMorgan, citing his concerns about a worsening of the banking turmoil. “I think they’ve been foolish to push them as high as they’ve done.”
The Fed’s quarterly survey of senior loan officers due on Monday will provide insight into how the collapse of several regional banks has affected willingness to lend elsewhere, while Wednesday’s consumer prices report will signal whether the Fed’s efforts to tame inflation are bearing fruit.
“If the Fed ends up surprising people in June [with a rate rise], it’s less likely to be a reaction to employment numbers and more likely to be a reaction to inflation numbers,” said David Donabedian, chief investment officer at CIBC Private Wealth.
“We still think we’ll see recessionary conditions unfold some time in [the] second half of the year . . . but the market has been pricing in too much too fast in terms of the extent of the Fed pivot.”
