Jobs Report: Unemployment Rate Slides; Dow Jones Rallies As Markets Brace For Big Fed Rate-Hikes

The jobs report showed solid hiring, as the jobless rate neared pre-Covid lows; however, the Treasury yield-curve inverted, as markets braced for big rate hikes.

The U.S. added 431,000 jobs to its economy in March, as the unemployment rate fell to 3.6% - just above prepandemic levels. The Dow Jones Industrial Average dipped to negative territory after the jobs report revealed a tightening labor market. It then recovered and closed slightly higher. The Dow Jones industrial average closed slightly higher despite the fact that a major part of its yield curve had inverted. Investors are pricing in expectations of a series big Federal Reserve rate increases.

The private sector payroll rose by 426,000 jobs in March while the government increased its employment by 5,000.

Wall Street expected that the March jobs report would show a larger gain of jobs. This included 458,000 jobs in the private sector. The job gains in January and February have been revised upwards by 95,000. The initial reported job gain of 678,000 in February has been revised to 750,000.

Economists predicted that the unemployment rate would drop to 3.7%, from 3.8%.

The average hourly salary rose by 0.4% in the last month and 5.6% over a year earlier, exceeding expectations for a 5.5% wage growth.

Despite the fact that wage growth is very high, it's not keeping pace with inflation. In February, the annual CPI rate of inflation reached 7.9%. Commerce Department reported Thursday that the inflation rate closely monitored by the Federal Reserve - the PCE price Index - reached a record high of 6.4% for the first time in 40 years. The lower PCE rate is partly due to its wider base, which includes the prices paid by government-sponsored health care programs.

The Dow Jones gained 0.4% on Friday after the employment report. It had fallen into negative territory earlier during the session. S&P 500 rose by 0.4%. The Nasdaq composite rose 0.3% after an earlier rally that was more firm failed.

Stock market rallies are based on the hope that the Federal Reserve will be able to rein in inflation and not tip the U.S. into recession. This optimistic outlook is dependent on the Fed's ability to tighten its monetary policy. The jobs report on Friday increased the chances that the Fed would raise its benchmark interest rate by a half point at their next meeting. This will be held May 3-4.

CME Group's FedWatch page shows that 75% of the odds are now in favor of a 50 basis-point increase, up from 70% yesterday. Wall Street expects a half-point increase at both the June and July meeting. The odds that the Fed will raise its key rate by at least 1.5 percentage points at the July meeting have risen to 61.5%, compared with 43.5% yesterday and 0% one month ago.

S&P 500 & Dow Jones closed Thursday within 5.5%-6% from their all-time highs. After a 20+% drop, the Nasdaq is now 11.4% below its peak closing. The Nasdaq underperformed both the Dow and S&P as interest rates have impacted growth stock valuations more.

After Friday's jobs data, the 10-year Treasury yield increased by 6 basis points to 2.38 percent. The two-year Treasury rate jumped to 2.45% and overtook the 10-year, inverting the yield curve.

Inversion of the yield curve, where short-term interest rates rise above long-term, is often a sign of an economic slowdown or recession. The flat yield curve is not a reason to panic, according to Maximilian Uleer of Deutsche Bank. The 10-year Treasury yield is up, not down, suggesting a fairly firm growth outlook.

He points out that inversions of the yield curve have preceded recessions five times, including the recession that Covid triggered in 2020. It took 7 to 34 month from the inversion of the yield-curve to the onset of a recession. He says that yield-curve reversals are a "poor predictor of timing."

The S&P 500 is no exception. Uleer writes that in all six cases the S&P 500 rallied after the inversion and reached its peak 3 to 25 month later. The average S&P gain is 19%.

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The leisure and hospitality industry added 112,000 new jobs. The number of factory jobs increased by 38,000.

The number of construction jobs increased by 19,000. The payrolls for health care and social assistance increased by 33,000. Retailers added jobs in the amount of 49,000.

The household survey used to calculate the unemployment rate showed that the number of employed people increased by 736,000. The number of people actively seeking or working in the workforce, which is defined as those who are employed, increased by 418,000. However, this was not enough to stop the rate from falling.

The percentage of people in working age (from 16 years old) who are participating in the workforce has increased to 62.4%. This is consistent with expectations.

The monthly survey of American households shows that 5.95 million Americans have no job. This is only a modest increase from the 5.8 million unemployed Americans in February 2020.

Fed projections indicate that the unemployment rate will ease to 3.5% in this year, and then hold there. It is expected to rise to 3.6% by 2024. This would be a'soft landing. Nevertheless, each drop in unemployment from the current levels will increase the odds that the Labor Market will exceed Fed projections.

Aneta Markowska, chief U.S. financial analyst at Jefferies, expects this. She wrote that "with (the) unemployment likely to drop to 3% by year's end, we expect wage increases to accelerate to around 6%."

This could lead to a spiral of wage and price increases as workers take advantage of the tight labor market in order to get pay increases not eroded by inflation. However, businesses would pass on these extra costs through higher prices.

For the Fed to achieve its soft economic landing, more non-workers must come out of the shadows, helping to reduce wage growth.

Follow Jed Graham @URL_ on Twitter for economic policy and financial market coverage.

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