Stronger US non-farm payrolls data has markets re-appraising the US economy and when the Fed will make a decision to cut interest rates.
US non-farm payrolls came in stronger than expected at 303k in March, versus 270k in February. The unemployment rate came in at 3.8% versus 3.9% in February. Average hourly earnings rose 0.3% in the month, against a revised 0.2% gain in February.
The key takeaway from this data release, says Daniel Casali, chief investment strategist at Evelyn Partners, is that the jobs market continues to expand, reducing the risk of a US economic recession.
He says: “The March non-farm payroll looks solid when compared to the 10-year average … and other measures of hiring outside of the payroll report also corroborate a healthy labour market… Essentially, the demand for available workers is running around two million higher than the supply of workers.
“Aside from new jobs being created in the economy, workers have also benefited from average hourly earnings wage rates that are up by more than 4% from a year ago. Taken together, nominal labour income (defined as the product of employment, wages rates and hours worked) expanded by 6% in March from a year ago. This shows workers are earning more than the current CPI inflation rate of around 3% to drive consumption growth.”
A risk for markets, he adds, is that layoffs and unemployment start to pick up sharply from here. “Under this scenario, this could lead to a collapse in consumer and business confidence that drives down economic growth. For now, this risk looks contained. The weekly initial jobless claims, an early read of the labour market, has been stable at a range of around 200-250k for the last two years.
“Arguably, a decent lead indicator for the US unemployment rate is the aggregate corporate profit margin. If profit margins are improving, there is less need for firms to fire workers and vice versa. As it stands the aggregate profit has been risen over the last two quarters and suggests that upside in the unemployment rate is probably capped.”
The bottom line, he adds, is that investors are “becoming a little more comfortable that the US can avoid a recession without a significant pick-up in inflation”. A benign macro backdrop which is “relatively constructive for stocks”.
Lindsay James, investment strategist at Quilter Investors, concurs, has similar views, saying: “Earlier signs of a softening labour market, marked by a modest rise in unemployment and subdued wage growth, have been contradicted by recent data. This suggests that job creation and wage increases are maintaining their momentum and confounding expectations of an economic slowdown.
“Tuesday’s ADP Employment report, which offers a focused view of the labour market, also highlighted an economy that was seeing job creation gaining momentum. This surge is attributed not only to the enduring strength of the service sector but also to a revival in cyclical industries like construction and manufacturing. However, substantial earlier revisions to past payrolls data, such as the 124,000 reduction in January’s figures, revised up today by 27,000, have introduced a layer of uncertainty, complicating the central bank’s data-dependent decision-making process.
“The Federal Reserve’s commitment to its dual mandate—achieving full employment and maintaining price stability—means that any further tightening of the labour market could reinforce other positive economic indicators, potentially delaying anticipated rate cuts.”
