In an unusual coincidence, the US jobs report was released on a holiday Friday — meaning stock markets were closed when the closely-watched economic data came out.
It was the first monthly payroll report since Silicon Valley Bank and Signature Bank collapsed. It also marked a full year of jobs data since the Federal Reserve began hiking interest rates in March 2022.
While inflation has come down and other economic data point to a cooling economy, the labor market has remained remarkably resilient.
Investors have had a long weekend to chew over the details of the report and will likely skip the typical gut-reaction to headline numbers.
What happened: The US economy added 236,000 jobs in March, showing that hiring remained robust though the pace was slower than in previous months. The unemployment rate currently stands at 3.5%.
Wages increased by 0.3% on the month and 4.2% from a year ago. The three-month wage growth average has dropped to 3.8%. That's moving closer to what Fed policymakers "believe to be in line with stable wage and inflation expectations," wrote Joseph Brusuelas, chief economist at RSM in a note.
"That wage data tends to suggest that the risk of a wage price spiral is easing and that will create space in the near term for the Federal Reserve to engage in a strategic pause in its efforts to restore price stability," he added.
The March jobs report was the last before the Fed's next policy meeting and announcement in early May. The labor market is cooling, but not rapidly or significantly and further rate hikes can't be ruled out.
At the same time Wall Street is beginning to see bad news as bad news. A slowing economy could mean a recession is forthcoming.
Markets are still largely expecting the Fed to raise rates by another quarter point. So how will they react to Friday's report?
Before the Bell spoke with Michael Arone, State Street Global Advisors chief investment strategist, to find out.
This interview has been edited for length and clarity.
Before the Bell: How do you expect markets to react to this report on Monday?
Michael Arone: I think that this has been a nice counterbalance to the weaker labor data earlier last week and all the recession fears. This data suggests that the economy is still in pretty good shape, 10-year Treasury yields increased on Friday indicating there's less fear about an imminent recession.
There's this delicate balance between slower job growth and a weaker labor market without economic devastation. I think this report helps that.
As it relates to the stock market, I would expect the cyclical sectors to do well — your industrials, your materials, your energy companies. If interest rates are rising, that's going to weigh on growth stocks — technology and communication services sectors, for example. Less recession fears will mean investors won't be as defensively positioned in classic staples like healthcare and utilities.
Could this lead to a reverse in the current trend where tech companies are bolstering markets?
Yes, exactly. It's difficult to make too much out of any singular data point, but I think this report will hopefully lead to broader participation in the stock market. If those recession fears begin to abate somewhat, and investors recognize that recession isn't imminent, there will be more investment.
What else are investors looking at in this report?
We've seen weakness in the interest rate sensitive parts of the market — areas that are typically the first to weaken as the economy slows down. So things like manufacturing, things like construction. That's where the weakness in this jobs report is. And the services areas continue to remain strong. That's where the shortage of qualified skilled workers remains. I think that you're seeing continued job strength in those areas.
What does this mean for this week's inflation report? It seems like the jobs report just pushed the tension forward.
it did. I expect that inflation figures will continue to decelerate — or grow at a slower rate. But I do think that the sticky part of inflation continues to be on the wage front. And so I think, if anything, this helps alleviate some of those inflation pressures, but we'll see how it flows through into the CPI report next week. And also the PPI report.
Is the Federal Reserve addressing real structural changes to the labor market?
The Fed was confused in February 2020 when we were in full employment and there was no inflation. They're equally confused today, after raising rates from zero to 5%, that we haven't had more job losses.
I'm not sure why, but from my perspective, the Fed hasn't taken into consideration the structural changes in the labor force, and they're still confused by it.
I think the risk here is that they'll continue to focus on raising rates to stabilize prices, perhaps underestimating the kind of structural changes in the labor economy that haven't resulted in the type of weakness that they've been anticipating. I think that's a risk for the economy and markets.
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