Fed hikes rates while labor market surprises

Fed raises rates

Wednesday’s Fed move fell in line with expectations and marks the tenth interest rate increase since March 2022. The new target range of 5.00% - 5.25% is the highest since August 2007. Federal Reserve Chair Jerome Powell stated, “A decision on a pause was not made today.” However, he did acknowledge it was “meaningful” that the post-meeting statement omitted a sentence present in the previous statement indicating future rate hikes. Despite Powell’s insistence that no decision was made, the market is predicting that the Fed will opt for a rate pause at the June meeting with a chance of rate cuts starting in July.

Labor market grabs headlines

Nonfarm payrolls, the number of new jobs in the private sector and government agencies, jumped significantly in April, adding 253,000 jobs. April’s total gained on March’s revised 165,000 figure (the initial estimate was 236,000), and easily beat market expectations of 180,000 jobs added. Professional and business services (43,000) and health care (40,000) led the gains.

Private payrolls continued the trend, as hiring at private companies ballooned in April. Private payrolls increased by 296,000, shattering market expectations of a 133,000 gain. The eye-catching number marks the largest gain since July 2022.

April’s unemployment rate came in at 3.4% against estimates of 3.6%. The unemployment rate, which ticked down from March’s 3.5%, is tied for the lowest unemployment rate since 1969.

U.S. job openings in March fell to their lowest level since May 2021, totaling 9.59 million. March marks the third straight month where total job openings fell after extremely high demand since mid-2021.

Initial jobless claims for the week ending April 29 totaled 242,000, gaining on the previous week’s total of 229,000. The market expected initial claims to come in at 236,000. Initial claims have remained relatively rangebound since early March, totaling no higher than 247,000 and no lower than 228,000.

Manufacturing and services data show improvement

April’s reading for the ISM manufacturing index, which measures the economic activity in the manufacturing sector in the U.S., totaled 47.1% compared to March’s 46.3% (a three-year low). The reading beat market expectations of 46.7%. Any reading below 50 on the index signals contraction in the manufacturing sector; April’s figure marks the sixth straight month below 50%.

A brighter picture shines in the services sector, where April’s ISM services index totaled 51.9%, exceeding both last month’s total (51.2%) and market expectations (51.8%). The sector has remained above the 50% threshold for 34 of the last 35 months as consumers continue to spend despite high inflation and the looming recession threat.

The market reacts

Rates ticked higher on the back of Friday morning’s stronger-than-expected nonfarm payrolls and unemployment reports, but still ended down on the week. The 2y treasury finished the week at 3.91% while the 10y treasury finished the week at 3.43%.

Recession fears loom large in the commodities world as oil prices hit a five-week low. Expectations of a potential supply cut at June’s OPEC+ meeting have kept prices somewhat stable, but Brent Crude finished the week at 75.30/bbl, marking the third straight week of price declines.

FX remains extremely volatile, with the Dollar Index (DXY) finishing slightly down on the week and hovering around YTD lows. Corporates continue to evaluate opportunities to hedge in this weak-dollar environment.