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The March nonfarm payrolls print beat all expectations, showing the economy added 303k jobs. In isolation, this was enough to see markets sharply trim expectations of Fed easing. However, the strength of the labour market was also visible amongst the accompanying data.
Revisions were positive, unemployment fell, and average earnings continue to grow at a robust pace. All told, this does not appear to be an economy that is slowing quickly enough for inflation to resume trending back towards target, validating the Fed’s caution towards cutting rates. That said, we think the details of today’s data are actually a little more nuanced than they first appear.
As such, while we don’t see Fed members gaining enough confidence to cut rates in June on the back of today’s report, the knee-jerk reaction to push back easing expectations may ultimately prove a little overdone.
Arguably the biggest puzzle for markets ahead of today’s job’s release was posed by Fed Chair Powell earlier in the week. He noted that “On inflation, it is too soon to say whether the recent readings represent more than just a bump”. Key to answering that question is the strength of the labour market, given that the remaining inflationary stickiness in the US is largely domestically driven. It also means that the 303k jobs added in March is concerning. For comparison, estimates for the neutral rate of employment growth are somewhere around 150k.
As such, the strength of this headline reading would suggest that the labour market remains hot, implying that the recent reacceleration in inflation is unlikely a blip.
But this is somewhat tempered by the composition of job gains, which were notably concentrated in healthcare (+72k), government (+71k) and construction (+39k). Granted, the wage sensitive leisure and hospitality sector added 49k jobs, but this is broadly consistent with pre-pandemic averages. Meanwhile job gains across other services industry roles added a further 16k, but overall employment remains below February 2020 levels, with employment also little changed in retail trade (+18k).
With the most rate sensitive sectors of the labour market broadly underperforming, this suggests that today’s headline is not as inflationary as it first appears, arguably more consistent with a slow return to 2% and a soft landing rather than persistent above-target inflation.
Significantly, the household survey pointed to the labour force participation rate growing 0.2pp to 62.7% last month, suggesting these job gains seen in the establishment survey are translated into increased economic capacity, rather than upside inflation pressures. This dynamic was similarly visible in hours worked, which rose by 0.1 to 34.4.
Admittedly the 0.1pp drop in the unemployment rate to 3.8% does suggest some labour market tightness remains, but this does not appear to be resulting in an acceleration in pay pressures.
While average hourly earnings rose by 0.3% MoM in March, and 0.346% on an unrounded basis, this is broadly in line with the past six months. Moreover, at 4.36% annualised, the pace of wage growth is broadly consistent with the Fed’s 2% inflation target, although the rate of pay growth did mark an acceleration from February’s upwardly revised print of 0.2%.
With this being the last payrolls release before the Fed next meets on May 1st, the size of today’s headline beat is likely to see Chair Powell remain hawkish given the optics of doing anything else. Even so, this still looks more consistent with a Goldilocks scenario to us, with an expansion in economic supply meaning that robust jobs growth is translating into an economic expansion rather than a reacceleration in upside inflation pressures.
Therefore, while June rate cut expectations have fallen from 70% to 60% post release, we continue to think that a June cut should remain the base case heading into next week’s inflation report.
Authors:
Simon Harvey, Head of FX Analysis
Nick Rees, FX Market Analyst