Why a Disappointing Jobs Report is Good News for the Markets

May 3, 2024

The U.S. economy added fewer than expected last month and the unemployment rate ticked up, in a clear sign that economic growth is moderating. The Dow Jones jumped more than 400 points on the back of the report, however, as traders became more optimistic that disappointing figures could clear the way for the Federal Reserve to begin cutting interest rates.

Nonfarm payrolls grew by 175,000 last month, according to the Labor Department’s Bureau of Labor Statistics. That’s well short of the 240,000 that economists polled by Dow Jones had been expecting and a significant slowdown from March’s downwardly revised total of 315,000. The unemployment rate also ticked higher to 3.9%, against expectations it would hold steady at 3.8%.

Some analysts have described the month’s job report as something of a goldilocks scenario, indicating an easing labor market and soft wage increases. Average hourly earnings were up just 0.2% from the month prior and up 3.9%, both below consensus expectations, which is an encouraging sign on the inflation front. At the same time, the number of workers holding full-time jobs soared by 949,000 on the month, while those hold part-time jobs slumped by 914,000, a promising sign that while economic growth is slowing, it remains positive.

The report will come as welcome news to Fed Chairman Jerome Powell, who just days earlier cited the strong job market and stubborn inflation as justifications for the Fed’s decision to keep rates elevated at the highest level in more than 20 years. It is unlikely that the month’s report alone will be enough to sway the Fed’s thinking. May’s jobs report will be released by the time Fed policymakers meet to discuss potential rate cuts at their mid-June meeting, and it remains to be seen whether this month’s report was a one-off anomaly or the beginning of a trend that gives policymakers confidence that inflation is on a sustained trend toward the Fed’s 2% target.

Traders are have grown more confident that rate cuts will likely begin in late summer. The probability of a rate cut in at June’s meeting did increase following the release of the report, but remains below 50%. Expectations of a September rate cut rose sharply, however, to more than 70%. That’s up from roughly 60% earlier in the week.

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