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US job market exceeds expectations with 272,000 jobs created in May

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The U.S. labor market added 272,000 jobs in May, far more than expected, pushing back market expectations for the timing of Federal Reserve rate cuts.

The Bureau of Labor Statistics’ figures for nonfarm employment last month compare with a forecast of an increase of 180,000 people in a Bloomberg poll of economists.

President Joe Biden, faced with attacks from Donald Trump on his economic record in the run-up to the US presidential election next November, welcomed what he called “the great American comeback” in terms of employment.

He noted that unemployment has now been at or below 4 percent for 30 months – the longest period in half a century. “Under my leadership, 15.6 million more Americans enjoy the dignity and respect that comes with a job,” Biden said.

U.S. employers have consistently continued to hire — often well beyond expectations — despite a succession of interest rate hikes that have pushed borrowing costs to their highest levels in more than two decades.

But voters have so far been reluctant to credit the president for economic performance and Biden’s electoral prospects could be boosted by interest rate cuts.

After the data was released Friday, the odds of a rate cut at the mid-September Fed meeting – before the election – fell from 81 percent to 57 percent, according to market prices.

Markets had previously fully priced in an interest rate cut by November. After the publication of employment figures, this was postponed to December.

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

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Treasury yields jumped in response to the news, with the two-year Treasury yield, which moves with interest rate expectations and inversely with price, jumping 0.17 percentage points on the day to reach 4.88 percent.

The dollar strengthened by 0.8 percent against the euro, with one unit of the latter reaching $1.08 on Friday afternoon. US stocks ended a choppy session slightly lower.

The figures come less than a week before the US central bank’s June meeting, at which it is expected to keep interest rates unchanged.

On the other hand, the European Central Bank cut rates this week for the first time in almost five years.

The strong U.S. payroll numbers are part of a broader trend in advanced economies. Inflation has been slower to fall in 2024 than expected, with strong labor markets supporting economic resilience.

The Fed, whose preferred inflation gauge is now 2.7 percent from its 2 percent target, has taken a cautious approach to reducing borrowing costs.

Economists at Citigroup changed their rate cut expectations after the jobs report was released, betting that the first action would come in September rather than July.

But Citi added that the report “does not change our view that hiring demand, and the economy as a whole, is slowing,” arguing that it would prompt the Fed to cut rates by a total of 0 .75 percentage points in September, November and December.

Figures released Friday show average hourly wages rose 4.1 percent year-on-year through May, significantly higher than the rate central bankers consider consistent with hitting their inflation target .

However, the unemployment rate also increased, from 3.9 percent to 4 percent.

Jason Furman, a former Harvard University administration official, said rising unemployment may be the most important part of the data released Friday.

“If we wake up next month and the unemployment rate hits 4.1 percent, I think that will get (the Fed’s) attention,” Furman said. “If you have an unemployment rate above 4, that would put rates lowering sooner into play.”

The number of employees for the month of April, previously estimated at 175,000, was downgraded to 165,000.

“There is very strong job growth, but the unemployment rate has increased,” said Ryan Sweet, chief U.S. economist at Oxford Economics. “For the Fed, it will be difficult if it manages to cut rates in September, but I don’t think this report takes that off the table.”

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News Source : www.ft.com

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