U.S. employment growth was stronger than expected in April, showing the economy’s resilience even as the Federal Reserve signaled it was “moving closer” to pausing its interest rate hike cycle.
The U.S. added 253,000 nonfarm payroll jobs last month, confounding expectations of a recession, according to a report from the Bureau of Labor Statistics on Friday.
Headline wage gains were partially offset by downward revisions to data from the previous two months, but unemployment rate and wage growth figures pointed to continued tightness in the labor market and raised doubts about whether the central bank will start cutting interest rates soon. As investors expected.
Two-year Treasury yields jumped to session highs following the data release, moving in line with interest rate expectations. It rose 0.15 percent to 3.94 percent on the day. Traders in the futures market — who had been pricing in the possibility of an interest rate cut in July ahead of the report — cut those bets.
“This report paints a picture of a heated labor market, and it doesn’t justify cut rates,” said Eric Winograd, senior economist for fixed income at AllianceBernstein.
The unemployment rate fell to 3.4 percent last month, compared with consensus estimates of 3.6 percent. Hourly wage growth strengthened 0.5 percent for the month, and increased 4.4 percent for the year.
St Louis Fed President James Bullard said the labor market is still “very tight” and demand will take time to ease.
“Rumors of the economy’s imminent demise are exaggerated,” he said during an event on Friday. He added that unemployment does not need to rise sharply to bring down inflation.
Jobs growth in April was particularly strong in professional and business services, while hiring also expanded strongly in the health and leisure and hospitality sectors.
Jack Janasiewicz, portfolio manager at Natixis Investment Managers, said hiring has been strong in areas that have suffered from labor shortages for some time or are less economically sensitive, while growth has been weak in more interest rate-sensitive areas such as retail and manufacturing.
Wages are a key factor in inflation, particularly in the service sector, so economists and investors have been watching closely for signs that higher interest rates are slowing the economy and reducing inflation.
The data came after the U.S. Federal Reserve raised its benchmark federal funds rate to 5.25 percent on Wednesday, announcing its 10th consecutive interest rate hike. Fed Chairman Jay Powell said the labor market was “abnormally tight” but “there are some signs that supply and demand . . . are coming back into better balance.”
Data released earlier this week supported Powell’s assessment, with job openings from April 2021 falling to a much smaller than expected level. Still, Friday’s figures were the latest reminder that inflationary pressures remain high.
Powell insisted on Wednesday that it will take some time for inflation to reach the Fed’s 2 percent target, but investors are betting that the Fed will cut rates, first as soon as July.
“The labor market is still resilient — you could make the argument that wage growth is slowing, but not fast enough . . . It’s still a low probability, but I don’t think you can write it off and say more raises are completely off the table,” Janacewicz said.
Investors will scrutinize the release of additional economic reports next week to determine whether the central bank will follow through with a pause.
David Kelly, JP Morgan’s chief global strategist, said it would be “very foolish for them to raise rates,” citing his concerns about a worsening banking crisis. “I think they were foolish to raise them as much as they did.”
The central bank’s quarterly survey of senior credit officials due on Monday will provide insight into how the collapse of several regional banks has affected the willingness to lend elsewhere, while Wednesday’s consumer price report will indicate whether the central bank’s efforts to control inflation are paying off.
“If the central bank surprises people in June [with a rate rise]This is less likely to be a reaction to the employment number and more likely to be a reaction to the inflation number,” said David Donabedian, chief investment officer at CIBC Private Wealth.
“We still think recessionary conditions will emerge shortly [the] Second half of the year. . . But the market is pricing in too fast for the size of the Fed’s focus.”