Jobs data improving, but not enough for Fed to talk about phasing out

Jobs data improving, but not enough for Fed to talk about phasing out


A help-seeking sign is displayed at a taco stand in Solana Beach, California.

Mike Blake | Reuters

Hiring improved in May, but 559,000 new jobs are not enough to get the Federal Reserve to start talking about cutting its bond purchases.

Friday’s Labor Department report on the new payrolls was below the expected 671,000, but neither was it weak enough to cast serious doubts on the economic recovery, although it reveals the underlying problems of the economy. ‘a shortage of workers and a mismatch of jobs.

Moderately strong data helped push stocks a little higher, and Treasury yields tilted before falling slightly. The 10-year benchmark yield fell to 1.58%. Yields move opposite to price.

John Briggs, global head of office strategy at NatWest Markets, said the report was a “golden loop” for risky assets, and “not too hot to bring in the Fed and not too cold to get in. worry about the economy “.

“You’re in an area where everything is going well. It’s better than last month,” Briggs said. “It’s not like it’s 1.2 million, and it’s not going to scare us off for the Fed. The next event is next week’s CPI, and people are going to worry about it being strong. . “

Inflation data warmer than expected as April Consumer Price Index helped fuel speculation that the Fed may start talking about cutting its bond purchases. The May CPI, which will be released on Thursday, follows the sustained rate of 4.2% for April.

Some strategists expect the central bank to be ready to talk about cutting bond purchases by the time it meets for the Fed’s Jackson Hole Economic Symposium in late August, but some market pros have said that a very strong jobs report could have put the issue on the table when the Fed meets on June 15-16.

The Fed’s intention is to first discuss reducing its $ 120 million monthly bond purchases before taking action. He would then spend many more months reducing the size of his purchases. At the end of this period, the Fed could be in the process of considering an interest rate hike, which is not expected by the market until 2023.

In the May report, the unemployment rate fell to 5.8% from 6.1% while the participation rate edged down to 61.6%. Job growth in April was revised up on Friday to 278,000 from 266,000 but was still about a quarter of what had been forecast for that month.

“Admittedly, it was not the ‘millions of jobs per month’ that looked like the baseline scenario expectations for late spring ahead of April wage data, but neither is it a disaster.” , said Jefferies economist Thomas Simons. “The data is consistent with other indicators of a labor shortage that was already well understood before and is expected to ease somewhat as improved unemployment benefit programs continue to expire. throughout the summer. “

Michael Gapen, chief U.S. economist at Barclays, said May’s report was close to what he expected and that he expects a steady pace of hiring over the coming months. “If I had a concern it was in the participation rate which has fallen further. There are still a lot of distortions and mismatches in the workforce. This is a crucial question for me in the long run. term, “he said. “Can we get people back? Are we underestimating the friction in the labor market right now? I think it will work out on its own. It may take two or three months. It will just take some time for the pairing process to happen.

Gapen has said he doesn’t expect to see millions of numbers explode for job creation in the coming months, and he doesn’t expect the Fed to focus any further on reducing its asset purchases.

“I don’t think the tapering discussion in June will be so heated,” he said. “I think that number tells them that the hiring rate is strong but not spectacular. It will continue to improve, and they should stay tight at this time.”

Gapen also doesn’t think the CPI report will prompt the Fed to act any sooner than expected. “I think it will be strong. It will reflect some normalization in the prices of services that had been depressed during the pandemic,” he said.

The Fed has said it expects a period of higher inflation that will prove to be transient. Readings for April and May are expected to be above normal, in part because of comparisons to low levels last year.

Economists are watching wage data for signs of inflation. Average hourly wages increased 2% year-on-year.

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