The March jobs report - with hiring exceeding estimates and the unemployment rate falling - increased the risks that the start of the rate cut cycle will be delayed. Even so, caution is needed with long lags and other monetary policy variables. The employment components of the ISM surveys indicate persistent weakness in both the services and industrial sectors.
The focus now turns to the trajectory of inflation, currently a more critical factor in the Fed's reaction function. The March CPI (to be released on Wednesday) is expected to show a modest slowdown in the monthly pace of core and headline inflation to 0.3% for the month - consistent with the Fed's annual target of 2.0% for core PCE inflation.
The minutes of Fed's last meeting will also be released this week and deserve attention. It should reveal how the members of the FOMC (Fed's Monetary Policy Committee) interpreted the mixed data leading up to the March 19-20 meeting and how convincing they consider the "no landing" forecasts to be.
The headline figures from the March jobs report generally surprised positively, with hirings, total employment, participation and weekly earnings all beating expectations. This increases the chances that the Fed will remain patient in its fight against inflation, further delaying the first rate cut.
However, the details were not so solid, with hiring concentrated in acyclical sectors and unemployment rising in parts of the economy. The duration of unemployment increased in March, reflecting a skills mismatch that cannot be corrected even by a patient Fed. Those with skills in high demand - especially in acyclical sectors or sectors that benefit from the spending of wealthier families - continue to find work, but others may be left behind.
Even so, the strong headline figures tilt the risk towards a slower pace of rate cuts this year. Jobs grew by 303,000 in March, up from a downwardly revised 270,000 in February. This far exceeded consensus estimates of 214,000. Employment gains were mainly concentrated in the health (72,000), government (71,000) and construction (39,000) sectors. Employment levels were little or unchanged in most other major sectors, including mining, manufacturing, wholesale trade, transportation and warehousing, information, financial activities and professional and business services.
The increase in total jobs reduced the unemployment rate from 3.9% to 3.8%. Average hourly earnings increased at a monthly rate of 0.3%, compared to the upwardly revised 0.2% in February.
As highlighted by Fed Chairman Jerome Powell in his April 3 speech, the disinflation process is uneven, and the March CPI report is expected to illustrate this point. After two "hot" inflation reports at the start of the year, rising energy prices should keep the core CPI under pressure, even as core inflation slowly moderates.
In the monthly figures, both should slow down to 0.3%. On an annual basis, this means that the main index will increase to 3.3% (compared to 3.2% previously) and the core should fall modestly to 3.7% (compared to 3.8% previously). Finally, annual inflation is expected to be around 3.0% throughout 2024 - low enough for the Fed to start cutting rates, but not low enough to end the battle against inflation this year.
The minutes of the March FOMC meeting are likely to explain why the dot plot has changed to fewer cuts in 2024. We expect to see a discussion of the reasons behind the strength of the economy, including the role of supply-side factors such as immigration in driving long-term growth and the long-term neutral interest rate.
The majority of FOMC members forecast three rate cuts in 2024, hoping that inflation will continue to moderate this year. But sustained strong demand due to increased immigration and the first signs of new problems in the supply chain could make the Fed more cautious than usual.
The strong market data on the US economy released last week had a strong impact on expectations regarding the start of the US interest rate cut cycle. The market is practically split on the first cut in June, pricing in a chance of around 51% at the time of the elaboration of this report.
This week will also bring important fundamentals for this discussion, with the release of the latest inflation data ahead of the next Fed meeting (on May 1st). If the data comes in line with expectations, recent market behavior points to a rise in US bond yields and the DXY in the short term, given that headline inflation is still expected to accelerate YoY.
However, confirmation of a slowdown in core inflation could be an indication that the market is more pessimistic than necessary about the US inflationary trend. The minutes of the Fed's last meeting should also be monitored, as they provide important "clues" about the US' monetary authority next steps.
