World labour markets defy odds and force reset of rate-cut bets
Labour markets across most of the developed world just keep on beating expectations, pushing back bets on interest rate cuts as hopes grow that central banks can pull off a soft landing after all.
The reasons for the high demand for workers — an aging workforce, lack of skilled labour and companies hoarding staff — are holding firm even as economies start to slow.
In all, the unemployment rate in developed economies remains near a record low, according to quarterly data from the OECD. The consequences of that resilience for borrowing costs triggered a sell-off in stocks and bonds this week.
While demand for workers may have waned from the initial post-pandemic surge, it’s still much higher than experts forecast it would be by now. In the U.S., for instance, the Congressional Budget Office last year forecast the unemployment rate would hit 5.1 per cent by now; it remains at 3.9 per cent today.
Data due Friday are set to show the U.S. economy added more than 200,000 payrolls in March, double the level that U.S. Federal Reserve chair Jerome Powell has said is sustainable.
As a result, markets continue to recast their pricing for Fed rate cuts — the odds for a move in June have slipped to around 59 per cent — and those forecasts could be pushed out again. They slipped below 50 per cent briefly this week after strong U.S. factory data.
The S&P 500 had its worst day in almost a month on Tuesday and the U.S. 10-year yield touched its highest level since November as investors started to come to terms with that shift.
Economists at Goldman Sachs Group Inc. estimate it would take an increase of 0.2 to 0.3 percentage points in the U.S. unemployment rate to justify three consecutive Fed cuts this year.
It’s a similar story elsewhere, even in economies that are slowing.
In Europe, where inflation has cooled in recent months, ECB president Christine Lagarde has cited pay increases as one of three main factors officials are watching. Investors have pushed back expectations for a first interest rate cut to June.
In Canada, where the population in 2023 soared by the most in more than 60 years, the jobless rate has barely budged as employers soaked up the new workers. In New Zealand, unemployment has only just reached four per cent and in Australia, a surprise surge in employment in February pushed the unemployment rate back down to 3.7 per cent.
Central banks have consistently cited tight labour markets as an inflationary force and one of their top considerations when deciding interest rates. Powell last week said the strong job conditions give officials more time to consider when to cut.
“The fact that the U.S. economy is growing at such a solid pace, the fact that the labour market is still very, very strong, gives us the chance to just be a little more confident about inflation coming down before we take the important step of cutting rates,” he said at an event at the Federal Reserve Bank of San Francisco.
To be clear, inflation remains the north star for central banks and the primary driver of policy. Powell has also recently said strong hiring on its own wouldn’t be a reason to avoid cutting rates.
LAGGING INDICATOR
To be sure, jobs tend to be a lagging indicator, with monetary policy taking about 18 months to filter through into the economy, so higher rates may yet take a toll. The U.K. in January registered its first increase in unemployment since July, but the rate remained below four per cent.
As consumer price pressures moderate back toward central banks’ comfort zones, forecasts that mass unemployment would be needed to get inflation down now look misplaced.
During an extended period of high interest rates, companies usually cut back on expansions. Not so this time. If anything, the jobs picture could remain tighter for longer as business sentiment and planned investment remain healthy.
“Many firms are likely engaged in labour hoarding,” said Citigroup Inc. economist Robert Sockin. “Firms know how difficult it is to find and train workers, and likely do not want to go through the same process in several quarters’ time when demand is stronger.”
The Jpmorgan Global Manufacturing PMI expanded again in March, with the highest reading since July 2022 as companies worldwide broadly experienced higher orders and output. Business Roundtable’s CEO economic outlook index rose to the highest level since 2022 in the first quarter on higher capital spending, employment and sales expectations.
“Higher interest rates appear only to have destroyed demand for jobs that never existed, i.e., vacancies,” Freya Beamish, chief economist at TS Lombard, said.