If there’s been one economic data point that forecasters and the Federal Reserve have had a difficult time getting a handle on, it’s been the labor market. And that continued this week, with a slew of data beating Wall Street’s expectations. 😮
Nonfarm payrolls rose 339,000 in May, topping the 190,000 estimate by a wide margin. This marked the 29th straight month of positive job growth, bringing the number of jobs created in 2023 to nearly 1.6 million. It also aligned with the 12-month average, showing that the labor market remains strong despite the Fed’s efforts to cool it.
The labor force participation rate was unchanged. However, a 369,000 decline in self-employment pushed the unemployment rate to 3.7%. 🔺
A 0.3% MoM increase in average hourly earnings aligned with estimates. Meanwhile, the 4.3% YoY increase was 0.1% below expectations. Additionally, the average workweek fell by 0.1 hours to 34.3 hours.
April’s JOLTs report from earlier in the week indicated 1.8 job openings for every unemployed person. That increased from 1.7 in March, as job openings jumped to 10.1 million. And the initial and continuing jobless claims trends remain volatile and near historic lows.
Overall, this combination of data keeps the Federal Reserve in a difficult spot. It recently came out and signaled a likely pause at the June meeting. However, its assumption that inflation will continue to trend lower includes a weaker labor market and reduced consumer spending. ⏯️
So far, we’ve not seen that. At best, we’ve gotten mixed signals from companies this earnings season about their view of the consumer. Many are baffled at how well spending has held up in the face of many challenges. But baffling aside, that’s what is happening. 🤷
The news sent treasury yields higher and stocks soaring. But, despite higher yields putting pressure on multiples and economic growth prospects, the market remains optimistic that corporate earnings can hold up in the current environment. As a result, stocks are going up.
The Federal Reserve’s next meeting is on June 13-14. Investors will be watching closely to see how the Fed interprets the current environment and adjusts its policy outlook. As of today, the bond market is pricing in a 70% chance of a June pause and a 30% chance for another 25 bp hike. And expectations for the first rate cut have been pushed out to January of 2024. 📆
Only time will tell who is right. But for now, optimism is reigning supreme. 🌞