“The payroll miss hands the baton to the bulls,” said Interactive Brokers’ Jose Torres. “Markets are rallying aggressively as incoming data point to a shorter journey across the monetary-policy bridge.”
The S&P 500 increased 1.3%, with stocks also benefiting from Apple Inc.’s post-earnings rally. The Nasdaq 100, which is heavily weighted in technology, rose 2%. Wall Street’s “fear gauge,” the VIX, fell to a more than one-month low.
Treasury two-year rates, which are more susceptible to upcoming Fed movements, fell seven basis points to 4.81%. Swap traders now expect around 50 basis points of policy easing this year, which equates to two rate drops. The dollar saw its worst week since March.
A slew of weaker-than-expected data items, ranging from jobs to services and manufacturing, drove the US version of Citigroup’s Economic Surprise Index to its lowest level since February 2023. The gauge calculates the discrepancy between actual releases and analyst estimates. Nonfarm payrolls increased by 175,000 in April, the lowest growth in six months. Unemployment rose to 3.9%, while wage growth stalled.
Rather than being concerned about a larger slowdown that may weigh on Corporate America, investors focused on the possibility that the fresh data could help alleviate some of the pressure surrounding the higher-for-longer policy narrative.
“The softer-than-expected payroll report suggests there is no heat in the economy that should keep inflation persistently high, which increases odds for rate cuts this year,” said Sonu Varghese, a senior economist at Carson
Fed Bank of Chicago President Austan Goolsbee told Bloomberg Television that more jobs figures like Friday’s would give him confidence that the economy is not overheating. Separately, Governor Michelle Bowman stated that inflation would likely continue high for “some time,” but that she believes price increases will eventually slow if interest rates remain at present levels.
Following Wednesday’s Fed decision, Chairman Jerome Powell stated that raising interest rates is unlikely to be the next move.
The April employment data, which was poorer across the board, supports Powell’s decision not to lurch hawkish at the May meeting and “is good news for the Fed and the market,” according to Krishna Guha of Evercore.
“We feel somewhat more confident in our base case that the Fed will start cutting by September,” he said.
According to Seema Shah of Principal Asset Management, the fresh employment data reignites the rate-cutting debate in the market and may explain why Powell was able to lean more dovish on Wednesday.
“This is the jobs report the Fed would have scripted,” Shah went on to say. “Of course, today’s weaker numbers need to mark the start of a new slower trend for multiple rate cuts to seriously be back on the agenda – but, by then, the new fear could be a slowing economy.”
Separate statistics released Friday indicated that the US services sector unexpectedly dropped in April for the first time since 2022, as a measure of business activity fell to a four-year low and an indicator of input prices increased.
“Today’s jobs report is the definition of Goldilocks: job growth that is gradually moving back to around trend amid a normalisation of wage growth,” said Gennadiy Goldberg from TD Securities. “This is definitely the kind of job report that the Fed
Overall, market experts believe that signals of a weakening economy may prompt the Fed to decrease interest rates in the future, but that inflation data will be critical.
“Are you worried that the US economy is overheating? According to Mark Hamrick of Bankrate, the April employment report calls that premise into question. “The statistics will need to align for the Fed to be certain that inflation is approaching its 2% objective before pulling the rate-cut trigger. It is still on high alert for unacceptably high inflation.
Last month, a surge in US equities failed as the Fed signalled that interest rates might remain higher for longer due to strong inflation. A dramatic slowdown in economic growth in the first quarter has also sparked “stagflation” speculation, but many market watchers have dismissed the likelihood.
According to Alexandra Wilson-Elizondo of Goldman Sachs Asset Management, the new jobs report should be seen by markets as a “welcome breath of fresh air, as it will hush the hawkish undertone in the market and any recent’stagflation’ fears.”
While Fed policymakers will be happy that the labour market is cooling, Tiffany Wilding of Pacific Investment Management Co. says the news is not soft enough to affect the Fed’s stance.
“Hiring was strong, unemployment remains low, and wages are likely to tick up again next month,” she said.
Wilding believes the Fed will attempt to get at least one cut in this year, but she expects the central bank to remove one or two cuts from its rate-path estimates when it presents the revised Summary of Economic estimates in June. In March, Fed policymakers reaffirmed their forecast of three interest rate decreases in 2024.