Moderate slowdown in US job, wage growth expected in March
Global shares retreated on Friday as geopolitical tension kept crude oil above $90 a barrel ahead of U.S. payroll numbers, and hawkish central bankers raised doubts about the pace and timing of interest rate cuts.
The threat of supply disruptions from prolonged conflict in the Middle East kept Brent oil futures above $90 a barrel, a level not seen since last October, with prices heading for their second weekly gain.
The dollar firmed against peer currencies after rebounding from a two-week low, while gold’s rally to record highs on Thursday came to a halt ahead of the U.S. payroll numbers.
The MSCI All Country stock index was down 0.3 per cent at 770.7 points as it continues to ease in the first week of the quarter after hitting a lifetime high at 785.62 points on March 21.
In Europe, the STOXX index of 600 companies dropped 1.2 per cent to 504.7 points, after Tuesday’s lifetime high of 515.77 points.
A cooling U.S. services sector and comments this week from Fed Chair Jerome Powell reinforced the view that rate cuts were likely to commence at some point this year.
However, some other Fed officials have taken a more conservative view, with Minneapolis Fed President Neel Kashkari, in particular, striking a more hawkish stance overnight, saying rate cuts might not be required this year if inflation continues to stall.
“It’s the first time I’ve heard those kind of statements, so the markets sold off, and at the same time we had a flare-up in geopolitical tensions in the Middle East,” said Mark Ellis,
Washington — U.S. job growth likely slowed moderately in March, while wage gains remained elevated, suggesting the economy ended the first quarter on solid ground and potentially delaying anticipated interest rate cuts from the Federal Reserve this year.
The Labor Department’s closely watched employment report on Friday is also expected to show the unemployment rate remaining below 4 per cent for 26 straight months, the longest such stretch since the late 1960s. The economy is outperforming its global peers, despite 525 basis points worth of rate hikes from the U.S. central bank since March 2022 to quell inflation.
Economists say most businesses locked in lower borrowing costs prior to the Fed’s tightening cycle, giving them some insulation from higher rates and allowing them to keep their workers. Household balance sheets are mostly healthy, helping to support consumer spending. The labor market has also benefited from a rise in immigration over the past year.
“The labor market is still quite tight, but it also looks like it’s loosening,” said
CEO of Nutshell Asset Management.
So far, however, there appears to be a healthy pullback in markets that had been grinding higher in a very tight trendline, making it look a bit stretched as investors ready for important U.S. payroll numbers, Ellis said.
He pointed to a jump in the VIX Wall Street’s ‘fear gauge’, which posted its highest close since Nov. 1.
“It suggests we are at a bit of a turning point now, whether this is a natural pullback in a bull market, or whether it’s going to turn into something a little bit more,” Ellis said.
U.S. non-farm payroll numbers for March are due before the opening bell on Wall Street, with economists expecting a rise of 200,000, compared with 275,000 in February, while the unemployment rate is likely to keep steady at 3.9 per cent.
David Page, head of macro research at AXA Investment Managers in London. “We are used to the labor market loosening by demand falling and people losing their jobs. Thankfully, this time around that’s not what’s happening.”
Nonfarm payrolls likely increased by 200,000 jobs last month after rising 275,000
“We think a print below 200,000 should put pressure on the dollar, endorsing the recent signs that the employment story is softening and that the Fed will be in a comfortable position to start cutting in the summer,” ING bank analysts said in a note.
U.S. stock index futures , , were trading firmer, recovering some ground after the three key indexes fell more than 1 per cent each on Thursday on hawkish Fed comments and Middle East tension.
Middle East tension
Markets digested news that Israel braced on Thursday for a possible retaliatory attack after its suspected killing of Iranian generals in Damascus this week, and Prime Minister Benjamin Netanyahu said the country would harm “whoever harms us or plans to harm in February, economists said in a Reuters survey. Estimates ranged from 150,000 to 250,000.
Easing financial conditions are boosting hiring in interest rate-sensitive industries like construction, where payrolls surged in February. Employment in sectors such as healthcare, leisure and hospitality as well as state and local government remain below pre-pandemic trends.
Economists expected these sectors to continue hiring, providing a base for job growth even as payroll gains are expected to slow. The National Federation of Independent Business’ measure of small businesses planning to add jobs over the next three months fell in March to the lowest level since May 2020. It is seen as a good predictor of payroll gains.
“The other thing that’s happened is that as financial conditions have eased, we have seen more interest-sensitive sectors, such as construction, start to pick up again,” said Dean Maki, chief economist at Point72 Asset us”.
In a later call with Netanyahu, U.S. President Joe Biden threatened to condition support for Israel’s offensive in Gaza on it taking steps to protect aid workers and civilians.
MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.45 per cent, tracking a late tumble on Wall Street as risk aversion dominated the market mood. The index was set to end the week little changed.
A holiday in China also made for thinner trade.
Tokyo’s Nikkei fell 2 per cent, pressured in part by a stronger yen, thanks to the prospect of further rate hikes there and more jawboning from Japanese officials.
Hong Kong’s Hang Seng Index edged down 0.6 per cent.
Fed officials’ comments supported the dollar against a basket of currencies , lifting it away from a two-week low hit after a downbeat U.S. services survey.
The euro was steady, and the yen rose to a two-week high.
Fed fund futures point to just under 75 basis points worth of easing this year, closer in line with the Fed’s projections and a significant pullback from nearly 160 bps worth of cuts priced in at the start of the year.
That shift has left U.S. Treasuries struggling, with the 10-year yield hovering near its highest in more than three months, last at 4.321 per cent.
The two-year yield firmed at 4.6520 per cent. Bond yields move inversely to prices.
In commodities, Brent edged up to $90.78 a barrel, after striking a more than fivemonth high on Thursday.
U.S. crude eased a touch barrel.
Gold retreated from a record high and was last slightly lower at $2,288 an ounce. to $86.51 per
—
Management in Stamford, Connecticut.
“The biggest negative effect of the rate hikes on the labor market has already occurred. What’s happening now is the easing of financial conditions is leading to better job growth in many sectors.”
Financial markets expect the Fed will start easing rates in June. Fed Chair Jerome Powell, however, reiterated on Wednesday the central bank was in no rush to cut after leaving its policy rate unchanged in the current 5.25 per cent-5.50 per cent range last month.
Average hourly earnings are forecast to have risen 0.3 per cent in March after gaining 0.1 per cent in February as some weatherrelated distortions fade. The annual increase in wages likely slowed to an estimated 4.1 per cent in March from 4.3 per cent in February, economists said. Wage growth in the 3.0 per cent to 3.5 per cent range is seen as consistent with the Fed’s 2 per cent inflation target. Inflation by most measures is running above target.