US Cooling Jobs, Investors Cheer Hot Market

A Goldilocks Jobs Report Sparks Hot Market

The long-awaited cool down in the red-hot U.S. labor market finally arrived in April, and investors couldn’t be happier about it. The latest jobs report from the Labor Department showed job growth slowed more than expected, unemployment ticked higher, and wage pressures moderated. The Goldilocks figures were music to Wall Street’s ears, sparking a market rally as it raised hopes the Federal Reserve can soon pause its interest rate hikes and eventually start cutting rates later this year.

Hiring and Unemployment Slow in Hot Jobs Market

The U.S. economy added 175,000 jobs in April, a healthy number but well below economist estimates of 240,000. It marks the smallest monthly job gain since December 2022. Perhaps more importantly, the unemployment rate rose to 3.9% from 3.5%, defying forecasts that it would hold steady. Wage growth also cooled, with average hourly earnings up just 0.2% from March, missing expectations of 0.3%.

Jobs Data Paves Way for Fed Pivot, Heating Up Markets

It was the first jobs report since October 2023 where payrolls, the unemployment rate, and wage inflation all came in weaker than projected. The slowdown in hiring, rise in unemployment, and cooling wage pressures suggest the Fed’s aggressive interest rate hikes over the past year are finally starting to meaningfully loosen the overly-tight labor market that has been a key driver of stubbornly high inflation.

“This is the kind of Goldilocks jobs report the Fed has been hoping for,” said Nadia Lovell, senior U.S. economist at Oxford Economics. “It shows the labor market is losing some steam, which should help relieve broader inflationary pressures in the economy. It paves the way for the Fed to hold rates steady soon.”

Rate Cut Bets Heat Up Markets

Investors wasted no time repricing their Fed rate expectations after the jobs data. According to the CME FedWatch tool, traders now see a 25 basis point rate cut as a done deal by September. Prior to the jobs figures, the first rate cut wasn’t fully priced in until November. The two-year Treasury yield, highly sensitive to Fed rate expectations, plunged as much as 16 basis points.

U.S. stock futures extended gains after the report, with the S&P 500 rallying over 1%. A calmer labor market alleviates pressure on the Fed to keep rates higher for longer to squash inflation. It clears the path for rate cuts, heating up risk assets like stocks.

Still a Hot Jobs Market, Just Cooler

Beneath the headlines, however, there were still signs the jobs market remains quite sturdy despite the April slowdown. The closely watched prime-age employment-to-population ratio ticked up to 80.8%, indicating a larger share of workers in their prime earning years found jobs. The labor force participation rate also increased.

“We’re not seeing widespread layoffs or heavy job losses yet,” said Aneta Markowska, chief financial economist at Jefferies. “The job market is cooling in a very gradual, digestible way for the Fed. As long as that continues, they can raise rates at a more measured pace and eventually hold steady without having to deal with a total economic downturn.”

Soft Landing Could Heat Up Markets Further

For investors hoping the Fed can engineer a soft landing by tapping the brakes hard enough to lower inflation without causing a severe recession, the April jobs report provides reason for optimism. It suggests the central bank’s rate hikes are working to bring excessive labor demand and wage growth to heel. Yet it also indicates the jobs market is downshifting at a steady, manageable pace rather than going into a freefall.

All Eyes on Powell to Keep Market Hot

Of course, Fed Chair Jerome Powell will have the final say on whether April’s numbers hit the sweet spot the central bank is aiming for. Investors will be hanging on his every word when he addresses the media after the Fed’s latest policy meeting this week. If Powell echoes the sanguine tone from the jobs report, it may clear the way for further market gains as rate cut bets get locked in. But if he expresses concern over still too-hot wage pressures or other pockets of inflation, it could quickly short-circuit the post-jobs report rally.

A Soft Landing Could Super-Heat Markets

For one month at least, Wall Street’s wish was the Labor Department’s command – a jobs report that checked all the right boxes for an economy gently gliding in for a soft landing. Now it’s up to the Fed to confirm that narrative. If so, a reluctant pause followed by rate cuts could super-heat risk assets like stocks in the months ahead.

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