Solid payroll gains shift risks to inflation
Nonfarm payrolls surprised to the upside for the second month in a row, indicating 115k job additions in April versus pre-release expectations for a more modest 65k of gains.
On the back of March numbers, which were revised up slightly to show a 185k employment increase that month, this should put to bed most, if not all, lingering labour market concerns. For incoming Fed Chair Kevin Warsh, these numbers are likely to kill off any prospect of a near-term rate cut, too. Rising price pressures are now clearly the greater concern for the Fed’s dual mandate framework.
Indeed, a resilient labour market raises the risk that rising energy costs will translate into a broader-based increase in price growth.
Looking through the details of the April labour market report, there is little to dispel such a notion. Granted, average hourly earnings undershot expectations by 0.2pp in April. But a 3.6% annual growth rate remains solid, representing an uptick relative to March, which saw pay growth revised down to 3.4% YoY. We are inclined to place little weight in a small downtick in labour force participation, especially when accompanied by a modest increase in weekly hours worked – to us, that looks like statistical noise rather than a meaningful signal.
More relevant in our view is the unemployment rate, which remains low and unchanged at 4.3%, something that will likely garner attention from the FOMC’s more hawkish wing in the coming weeks.
In addition, signs of economic resilience are not exclusive to the contents of the household survey. A breakdown of job gains from the establishment report also points to robustness in demand conditions. Healthcare (+37k) continues to add roles at a solid pace, in keeping with recent trends. But a 30k rise in transportation and warehousing employment, accompanied by retail trade, which added 22k in April, suggests that economic conditions remain supportive of household spending levels.
Putting all of this together, the odds of an FOMC rate cut in 2026 look to be rapidly retreating.
The risks from surging energy prices, however, appear increasingly concerning. So, while Warsh may have previously signalled a preference for rate cuts, weighing on market rate expectations, we see growing scope for swap pricing to turn more hawkish, especially if CPI data next week delivers the expected jump in prices. For the dollar, this backdrop should prove supportive, with rate expectations in the US having lagged those for other countries over recent months. That leaves room for traders to play catch-up, with positive implications for the buck.
Author:
Nick Rees, Head of Macro Research
Disclaimer
This information has been prepared by Monex International Markets plc, part of Monex S.A.P.I. de C.V. (“Monex”). The material is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is, or should be considered to be, financial, investment or other advice on which reliance should be placed. No representation or warranty is given as to the accuracy or completeness of this information. All entities in the “Monex” group of companies are regulated for different products and services within the jurisdictions in which they operate. Details of the different entities can be found here. Details of the respective entities’ regulated status and available products and services can then be found on the relevant links to the individual jurisdictions’ website.