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Market Update

Fed raises rates amid a plethora of employment data

Date:
May 9, 2022

Summary

The Federal Reserve raised the Fed Funds rate by 50 bps, bringing in the largest hike since 2000 in an effort to fight the highest inflation rate the country has seen in 40 years. Job openings and job quits hit record highs in March, while April nonfarm payrolls came in above expectations.

Federal Reserve raises rates

The Federal Reserve raised the Fed Funds rate by 50 bps, bringing in the largest hike since 2000 in an effort to fight the highest inflation rate the country has seen in 40 years. The unanimous vote, which brought the Fed Funds rate to a range of 0.75% to 1%, could be the first in a series of rate hikes throughout 2022. The Fed will also begin to reduce its balance sheet by $47.5 billion per month starting in June and will ramp reductions up to $90 billion per month starting in September. Despite the record inflation, Powell maintained that the Fed would not be considering rate hikes of more than 50 bps for the time being. Equities rallied strongly after the FOMC statement, before falling the rest of the week. The 10-year Treasury yield hit its highest level since 2018 on Thursday after breaking the 3% barrier on Monday and Wednesday. Yields reached as high as 3.14% on Friday. Given the relatively flat back end of the curve, Chatham has seen clients explore forward starting swaps to extend current hedges.

Labor market update

A jam-packed week of employment data kicked off with a major headline, as the Job Openings and Labor Turnover Survey (JOLTS) report showed that job openings and job quits hit record highs in March. Job openings totaled 11.55 million, increasing by 205,000 from February’s total. Retail trade (+155,000) and durable goods manufacturing (+50,000) led the way with increases in openings. Meanwhile, job quits increased by 152,000 from February, bringing the total to 4.54 million. 88,000 quits occurred in the professional and business services industry, joined by an additional 69,000 quits in the construction industry.

The April ADP employment report, which measures nonfarm private sector employment, was released on Wednesday. Private payrolls rose by 247,000 in April, coming in well below expectations of a 390,000-payroll jump. The leisure and hospitality industry gained 77,000 jobs, while the information industry was the only industry to lose jobs (-2,000). The 247,000-job increase marks the smallest gain in jobs since April 2020.

Thursday brought another headline statistic, as the Bureau of Labor Statistics reported that labor productivity fell 7.5% in the first quarter of 2022. The 7.5% decrease in productivity marks the largest decline since the third quarter of 1947. Unit labor costs also increased 11.6%, bringing the average increase over the last four quarters to 7.2%, the largest gain since the third quarter of 1982. Both measures exceeded expectations considerably (7.5% actual vs. 5.2% estimate, 11.6% actual vs. 10.5% expected). Initial jobless claims for the week ending April 30 were also announced on Thursday, totaling 200,000.

The week ended with the biggest employment numbers on a monthly basis, the nonfarm payrolls report, and unemployment. The U.S. added 428,000 jobs in April, slightly higher than expectations of a 400,000 gain. However, the unemployment rate came in above expectations (3.6% actual vs. 3.5% estimate). The leisure and hospitality industry gained the most jobs in the month of April (+78,000), while manufacturing and transportation and warehousing followed closely behind (+55,000 and +52,000).

(Related insight: Read the article, "How to maintain treasury proficiency and continuity amid the 'Great Resignation'")

Graph of labor productivity and labor costs

Commodities update

Crude oil experienced increased volatility after the European Union (EU) proposed to ban Russian oil imports by the end of the year. Along with the move to ban oil, the EU is also looking to remove Russia’s largest bank, Sberbank, along with two other banks from the SWIFT international payments network. The EU had already moved to ban Russian coal imports, but due to the dependency on Russian oil from some countries, finding consensus has been harder to come by. Hungary claimed it could not support the ban because it could threaten the country’s energy security. As a result, the EU has offered longer transition periods to Hungary and other select countries that rely heavily on Russian oil, including Slovakia and the Czech Republic. WTI crude finished the week just under $110/bbl.

(Related insight: Watch the on-demand webinar, "Staying Cool Amidst Commodity Volatility")

The week ahead

April inflation headlines this week’s data after March CPI came in at a 40-year high. Fed Chair Jerome Powell indicated that a one-month drop in inflation would not drastically change the Fed’s expected rate hikes. Other data this week includes April’s NFIB small-business index and April’s Import price index.

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Disclaimers

Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit chathamfinancial.com/legal-notices.

Transactions in over-the-counter derivatives (or “swaps”) have significant risks, including, but not limited to, substantial risk of loss. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. This material has been prepared by a sales or trading employee or agent of Chatham Hedging Advisors and could be deemed a solicitation for entering into a derivatives transaction. This material is not a research report prepared by Chatham Hedging Advisors. If you are not an experienced user of the derivatives markets, capable of making independent trading decisions, then you should not rely solely on this communication in making trading decisions. All rights reserved.

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