US Payrolls surge pushing rate cut expectations back to autumn

The payrolls data for March was hot. At 303k, this was much higher than the expected 214k. This was the highest reading since May 2023, and was driven by a surge in private sector hiring, with private payrolls up by 232k, well above the 170k expected. The unemployment rate ticked lower to 3.8% from 3.9%, and wage growth moderated as expected, with the annual rate of average hourly earnings falling to 4.1% from 4.3%. The labour force participation rate also ticked higher to 62.7% from 62.5% in February, further reinforcing the strength of the US economy in Q1.

Service sector and government jobs remain strong

Strong jobs growth was recorded once again in education and health services, leisure and hospitality and in government, which has been creating a large number of jobs in recent months. The strong trend in government jobs could be linked to a hiring blitz before the election, thus it may not last. However, the trend in government jobs is worth watching, and if it shows signs of slowing then it might suggest that jobs growth overall will also slow.

Overall, this is an extremely strong report, and suggests that the US economy is firing on all cylinders, which is why the labour market is this strong. We have mentioned in recent notes that the establishment survey, which collates the NFP report, has been stronger than the household survey in recent months. However, even the household survey, which measures the unemployment rate, showed resilience last month. The unemployment rate fell, and the number of unemployed people was little changed, after a large increase in February. The US economy is currently in jobs growth mode, and is not shedding workers, which is a sign of strong demand in the US economy and is at odds with other countries including Europe. This labour market report is American exceptionalism in full swing.

Wages may have moderated, but the annual rate of growth is still 4.1%, over double the Fed’s target rate for inflation. Thus, wage growth and a robust jobs market could still  fuel inflation down the line.

Market reaction: Treasuries take the brunt of selling, as Dollar surges

Unsurprisingly, the market reaction was fierce. European stocks have extended losses; however, US stocks are slightly higher. The stock market reaction could be in response to the labour market indicating that the US economy is in a strong position, which is positive for corporate profits down the line. However, we expect stocks to be volatile in the short term as the market tries to figure out what it means for stocks if interest rate cuts aren’t coming until Autumn. The biggest reaction was felt in Treasury market. The 2-year Treasury yield is higher by 6 basis points, while the 10-year yield is higher by 7 basis points so far on Friday. This has supported broad-based dollar strength, and the dollar index is higher across the board. The dollar is the strongest currency in the G10 so far this week, as US Treasury yields rise, and interest rate expectations get pushed back.

Rate cut expectations: September more likely for the first rate cut

The market is now expecting the first rate cut from the Fed to come in September, although the expectation of 2 rate cuts and a high chance of a third rate cut remains unchanged for now. This labour market data does shift the dial for the Fed. Although CPI data will also be watched closely, this supports the Fed holding off from rate cuts in H1, and potentially waiting until later in the year, as the economy remains extremely strong. It could also be a sign that the ECB and BOE will cut rates first, which is good news for the dollar. As mentioned, this report makes it less likely that the US stock market will experience the same rally that it did in Q1, however, it shows resilience and strength in the US economy, which is actually good news for stocks and could limit any downside in the short term.