US labour market powers past expectations with 272,000 jobs added in May

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The US labour market added 272,000 jobs in May, far more than forecast, pushing back market expectations for the timing of Federal Reserve rate cuts.

The figures from the Bureau of Labor Statistics compare with economists’ expectations in a Bloomberg poll of a 180,000 rise in non-farm payrolls for last month.

The data comes at a critical time ahead of this November’s US presidential election between Joe Biden and his Republican challenger Donald Trump.

Biden’s administration is keen to advertise job growth during his presidency but would also benefit from interest rate cuts from the current 23-year high of 5.25-5.5 per cent.

After the data release, the chances of a cut ahead of the election, at the Fed’s mid-September vote, fell from 81 per cent to 61 per cent, according to market pricing.

The dollar also rose 0.5 per cent against the euro at $1.083.

“Numbers like these confirm our view that inflation is not going to come below to 2.8 or 2.9 per cent by December, making it really difficult for the Fed to justify a cut before the end of the year,” said Roger Aliaga-Diaz, Vanguard Americas chief economist. The central bank’s target is 2 per cent.

Markets had previously fully priced in an interest rate cut by November. After the jobs figures were published, that was pushed back to December.

Treasury bond yields also surged and stock futures swung into the red in response to the payrolls data.

The two-year Treasury yield, which moves with interest rate expectations and inversely to prices, rose to 4.86 per cent after the release.

S&P 500 futures fell on expectations that monetary policy will remain tighter for longer.

“Strong job growth and rising wage inflation supports our long-held view that interest rates will stay higher for longer,” said Torsten Slok, chief economist at Apollo Global Management. “We continue to expect no Fed cuts in 2024.”

The release comes less than a week before the Fed’s June meeting when the US central bank is expected to keep interest rates on hold.

US inflation has proved more obstinate than previously thought and the Fed has taken a cautious approach to lowering borrowing costs.

According to Friday’s figures from the Bureau of Labor Statistics, the US unemployment rate rose to 4 per cent from 3.9 per cent.

The payrolls number for April, previously estimated at 175,000, was downgraded to 165,000.

“There’s very strong job growth, but the unemployment rate did tick up,” said Ryan Sweet, chief US economist at Oxford Economics. “For the Fed it is going to be a close call if they can cut in September, but I don’t think this report takes that off the table.”