April 6, 2024: Explosive Employment Growth, Financial Market Reaction, and Outlook on Major Economic Events
The US’s Explosive Employment Situation and Financial Market Reaction
On April 5, 2024, the March employment report released in the US contained contents that greatly exceeded market expectations. New employment rose to 303,000, marking the largest increase since May of last year and significantly surpassing Wall Street’s expectation of around 210,000. This figure was also higher than February’s 270,000, with data from the past two months being revised upwards by 22,000, effectively resulting in an increase of 325,000 jobs.
Government jobs increased by 71,000 and private employment by 232,000, with significant job gains in healthcare, leisure/hospitality, construction, and retail sectors. The unemployment rate decreased to 3.8%, and the labor market participation rate increased to 62.7%. The average weekly working hours rose to 34.4 hours, and the hourly wage growth rate was recorded at 0.3% month-over-month and 4.1% year-over-year.
Following this data release, the New York bond market saw an additional rise in interest rates, and the probability of a rate cut in June dropped from 66% to 54%. This reflects the stronger-than-expected robustness of the employment market.
Diverse Interpretations and Projections of the Financial Market
Financial market reactions to the employment report were mixed. Some saw the strong employment situation as a factor reducing the possibility of a Fed rate cut, while others evaluated that as long as wage growth rates do not significantly increase, a rate cut could still be possible. Ultimately, the necessity to gauge future economic policies through inflation data was raised.
Several financial institutions adjusted their economic forecasts for the timing and number of rate cuts based on this employment report. For instance, Pimco and KPMG adjusted their forecast for the number of expected rate cuts this year from three to two, while Goldman Sachs supported Powell Chairman’s logic that immigration-driven employment strength would not significantly affect inflation and maintained a strong GDP growth outlook. Conversely, JPMorgan adjusted its expectation for the first rate cut from June to July.
All these analyses underscore the importance of the upcoming March Consumer Price Index (CPI) announcement next week. It will be a crucial indicator of the current state of the US economy and the future direction of central bank policies.
Complex Market Responses and Outlook
The New York Stock Exchange started on a positive note, reflecting the positive aspects of the employment data. The market evaluated that the wage growth rate meeting expectations and the overall strong employment situation along with the slowdown in wage increases align with the so-called ‘Goldilocks’ scenario — an economy that is neither too hot nor too cold. This situation provides an environment where stock prices can rise even without a rate cut.
Experts from Yardeni Research and Independent Advisor, highlighted the importance of employment conditions in boosting consumer spending and economic growth. Especially, the March employment data showed an increase in working hours along with a 4.1% year-over-year wage increase, resulting in a 5.9% increase in weekly private income. This signifies an increase in real income, even considering inflation, which could stimulate consumption and positively affect economic growth and corporate profits.
As the market approached the afternoon, stock prices rose by 1.1 to 1.7%. However, some ‘hawkish’ Fed members, such as Dallas Federal Bank’s Lorie Logan and Director Michelle Bowman, expressed a cautious stance on a rate cut. Logan emphasized it’s too early to consider a rate cut and highlighted the importance of being prepared to respond appropriately if inflation declines stall. Bowman also indicated that it isn’t the right time for a rate cut, expressing concerns over rising inflation risks.
Oil Price Increase and Background
Oil prices, with West Texas Intermediate (WTI) crude, increased by 0.37% to close at $86.91 per barrel. This was partly due to geopolitical tensions, particularly between Iran and Israel, contributing to the year’s 21.30% increase in oil prices. Technical analysis showed a ‘golden cross’ phenomenon, suggesting further potential increases. JP Morgan and Standard Chartered, among others, forecasted additional rises in oil prices, citing market underestimation of supply shortages.
The energy sector rose by 1.09%, and the industrial sector by 1.43%, thanks to optimism surrounding AI’s impact on industrial stocks. Goldman Sachs noted that stocks exposed to AI had more than doubled since the start of 2023, including companies involved in building AI data centers or cooling systems, indicating a broad interest in leveraging AI technology across various industries.
Bond Market and Interest Rate Trends
In the bond market, interest rates widened, with the 10-year yield rising by 9.1 basis points to 4.40% and the 2-year yield by 10.7 basis points to 4.748%, both reaching their highest levels this year. The probability of a rate cut in June fell below 50% in the Fed Watch market. ING analyzed that while interest rates typically decline noticeably after the Fed’s peak rates, they are still high and approaching 4.5%, with a risk of rising to 5%.
Gold Price Forecast
Gold prices surpassed $2330 per ounce, setting another record high. This reflects the rise on 9 out of the last 10 trading days and 6 out of the last 7 weeks. David Einhorn, founder of hedge fund Greenlight, highlighted in a CNBC interview that inflation is expected to accelerate again, making gold a significant part of his portfolio.
Saxo Bank predicted that gold and silver might undergo adjustments in the short term, but with expectations of rate cuts leading to dollar and interest rate declines, gold could potentially rise to $2500 per ounce, and silver to $30 per ounce.
The stock market ended with a reduced gain by the close, with the Dow up by 0.80%, the S&P 500 by 1.11%, and the Nasdaq by 1.24%. Meta surged over 3%, setting a record high.
Conversely, Tesla’s stock fluctuated following reports by Reuters that Tesla had scrapped plans for a cheaper electric car, Model 2, focusing instead on developing autonomous robotaxis. Following Elon Musk’s denial of these reports on X (formerly Twitter), the stock partially recovered but closed down 3.63%. After the market closed, Musk announced on X that the robotaxi would be unveiled on August 8, leading to a 3% increase in after-hours trading.
Upcoming Economic Events: CPI, PPI, and Corporate Earnings Announcements
Next week is set to bring crucial economic indicators to the fore. The March Consumer Price Index (CPI) and Producer Price Index (PPI) are anticipated to capture the market’s attention. According to Vital Knowledge, if March’s inflation data continues to run hot, it may challenge Chairman Powell’s previous statements attributing high inflation in January and February to seasonal factors and temporary phenomena. The core inflation rate, excluding energy and food, is expected to have risen by 0.3% month-over-month, a slight decrease from February’s 0.4% rise.
The expected increase of 0.3% month-over-month still exceeds the Fed’s 2% inflation target, which requires a monthly rise of 0.17%. Some institutions predict a lower inflation increase, which could lead to market optimism. The largest obstacle to returning inflation to 2% is seen in housing costs.
The US Treasury is scheduled to conduct auctions for 3-year ($58 billion), 10-year ($39 billion), and 30-year bonds ($22 billion), potentially impacting the market. Additionally, the European Central Bank (ECB) is expected to announce its monetary policy meeting results, likely maintaining interest rates but possibly signaling dovish intentions for a rate cut in June. This comes after the Eurozone’s March inflation dropped to 2.4% from February’s 2.6%, indicating a recessionary economic growth rate.
The start of the earnings season will also provide insights into whether the rally that began in late October, partly driven by expectations of increased corporate profits, aligns with reality.
In a scenario where rate cut prospects are pushed back, corporate earnings will need to meet market expectations to continue driving the market upwards. Notably, on April 12, JPMorgan, Wells Fargo, Citigroup, and Delta Airlines are among the companies set to disclose their earnings.
This week and the next will offer market participants critical information, potentially influencing investment decisions amidst a volatile market environment. Investors will closely monitor these events, seeking opportunities and managing risks in the changing market landscape.
