US Employment Trends Signal Potential Fed Rate Cuts

As job growth moderates and the unemployment rate increases, economic indicators suggest that the Federal Reserve might consider rate cuts sooner than expected.

Published July 06, 2024 - 00:07am

4 minutes read
United States
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The U.S. stock market is experiencing a notable rebound as traders pivot their focus from economic slowdown signals to the promising prospect of Federal Reserve rate cuts. Despite recent data showing a deceleration in job growth and an increase in unemployment, equities are moving toward fresh all-time highs.

The latest figures from the Labor Department indicated that nonfarm payrolls rose by 206,000 in June, a slight edge above the 190,000 forecasted by Bloomberg. Concurrently, job growth revisions for the previous two months were adjusted downwards by 111,000 jobs, highlighting a more subdued labor market. These changes saw the unemployment rate rise to 4.1%, the highest since late 2021, and average hourly earnings cooling off.

Economic analysts have varying perspectives on the implications of this data. Neil Dutta of Renaissance Macro Research stated, Get on with it, emphasizing that the report bolsters expectations of a September rate cut. Chris Larkin of E*Trade from Morgan Stanley echoed this sentiment, noting that the data suggests a slowing labor market, potentially keeping the Fed on track for a rate cut as early as September.

On the financial markets side, the S&P 500 was poised for its 34th record this year, reaching new heights of 5,560. The Nasdaq 100 climbed by 1%, fueled by Meta Platforms Inc.'s 5% surge. Treasury 10-year yields fell by eight basis points to 4.28%, and the dollar saw its first weekly drop in seven weeks.

Notable financial market reactions include the influx of $19 billion into bond funds, the largest weekly inflow since February 2021, and $10.9 billion into global equity funds, marking the longest winning streak since December 2021, according to Bank of America Corp. Michael Hartnett, BofA strategist, attributed this trend to investors locking in peak yields.

Similarly, Brian Coulton, the chief economist at Fitch Ratings, acknowledged the cooling labor market, suggesting it will reassure the Fed of its ability to safely start cutting rates. These rate cuts would follow a period of aggressive tightening in 2022 and 2023, aiming to combat inflation and stabilize economic conditions.

Healthcare, government sectors, and construction were among the leading job creators in June. The healthcare domain added 49,000 jobs, with significant hiring in ambulatory healthcare services and hospitals. Government employment increased by 70,000 jobs, driven by local and state government positions. Contrarily, the retail and professional business services sectors saw job reductions, with temporary help jobs falling by 49,000.

Despite the positive outlook from many analysts, some remain cautious. Torsten Slok of Apollo Global Management maintains that the Fed will likely not cut rates in 2024, arguing that it will take more time to cool down the economy and inflation effectively.

The Federal Reserve's biannual testimony by Chair Jerome Powell, slated for the upcoming week, and the forthcoming consumer-price index issuance, will be pivotal in shaping expectations. Chris Low at FHN Financial noted that favorable CPI data would further strengthen the case for a September rate cut.

Global economic observers are keenly monitoring the interplay between the labor market and the Fed's policy maneuvers. The higher unemployment rate could signal a broader economic slowdown, but the incremental job creation and subdued wage growth might offer the Fed the window to initiate rate cuts without jeopardizing economic stability. The continuing economic narrative will hinge on critical indicators scheduled for release and the Fed's responsive strategies to evolving market conditions.

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