CIO Notebook: April Payrolls Supportive of Soft Landing Narrative

May 03, 2024

We remain focused on the destination for rates, rather than the path, and are positioning portfolios appropriately for both rates and inflation to be modestly lower by year-end.

After several months of steamy data that lowered expectations for Federal Reserve (Fed) rate cuts and created fears of re-accelerating inflation, the first glimpse into U.S. economic data for April delivered a short-term sense of relief. April’s non-farm payrolls report showed that the U.S. economy added +175k jobs versus consensus for a +240k gain. The monthly gains were driven by health care and social assistance, transportation and warehousing, and retail trade, accounting for gains of +87k, +22k and +20k, respectively. Most industries exhibited positive or flat readings for the month with the most notable outlier being a -16k decline in temporary help services. Also, slight revisions were made to both February and March payrolls data, with February’s print revised down once again to +236k from +270k and March revised up to +315k.

Unemployment ticked slightly higher to 3.9% from 3.8% the month prior while the participation rate remained steady at 62.7%. The number of people employed part-time for economic reasons, those currently not in the labor force who want a job, and those marginally attached to the labor force were all essentially unchanged in the month, indicating no real shift in terms of the makeup of the labor market. The average workweek for all employees declined only slightly by 0.1 hour to 34.3 hours, also an indication that demand remains fairly consistent.

In our view, the most encouraging aspect of the report was the moderation in wage growth: average hourly earnings rose by only +0.2% month-over-month and +3.9% year-over-year. This was below expectations of most economists for a +0.3% or +0.4% month-over-month increase and, if projected out over a 12-month period, is consistent with +2% wage inflation. Interestingly, the print is inconsistent with the previously released employment costs index, also compiled by the U.S. Bureau of Labor Statistics, which showed that wages and benefits increased by +1.2% in the first quarter and +4.1% over 1Q 2023.

In terms of trends we are watching, +14k jobs were added in goods-producing industries with construction and manufacturing accounting for +9k and +8k, respectively. Manufacturing hours worked also remained stable at 40 hours for April, perhaps indicating that the weakness in the ISM Manufacturing PMI survey reported yesterday is not the resumption of the previous contractionary trend. In addition, we believe the sharp deceleration in jobs added in leisure and hospitality in the month, from a prior three-month average of +58k to only +5k this month, could be contributing to the reported decline in wage growth; that figure could bounce back in May.

As we cited in our note earlier this week on the Fed meeting, we believe the emphasis that Fed Chair Jerome Powell placed on the dual mandate in his press conference on Wednesday afternoon amplifies the importance of this report. Balance in the labor market could yield continued moderation in wages and this should transmit to CPI and PCE over the coming months. In terms of rate cut expectations, the timing of the first rate cut was pulled forward incrementally following today’s release with several market observers hypothesizing that today’s print puts July back in play for the FOMC.

In our view, equities are rallying early and 2-year yields are falling in response to the print, but it is important to note that the Fed has been transparent about the difficulty of forecasting in this dynamic environment and, as such, is telegraphing perhaps an overemphasis on individual data points. This creates the foundation for outsized moves in markets when data is reported outside of consensus, such as we may see today. Instead, we remain focused on the destination for rates, rather than the path, and as a result are positioning portfolios appropriately for both rates and inflation to be modestly lower by year-end.


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