No, April’s ‘Goldilocks’ US Jobs Data Don’t Shed Light on Rate Cuts

Does America’s April jobs report have implications worldwide? Some financial publications we follow argue it does after last month’s US hiring slowdown and tiny uptick in the unemployment rate. This report, out late last week, inspired some headlines to argue a cooler jobs market made US Federal Reserve (Fed) rate cuts more likely—which, in turn, supposedly gives policymakers at the Bank of England (BoE) more wiggle room to cut its interest rate first, thereby supporting the economy and stocks. That flip-flopping to expectations for US rate cuts reverses many viewpoints we had seen in financial headlines from mere days earlier. And in the process, we think the swinging outlooks highlight a simple point: Trying to forecast monetary policymakers’ moves is an exercise in futility—investors benefit from tuning out such speculation, in our view.

On the jobs front, April US nonfarm payrolls rose 175,000 in April, lower than expectations for 235,000.^[i] Notably, government hiring slowed considerably (up 8,000 in April compared to the average of 55,000 over the past 12 months).^[ii] The unemployment rate also ticked up to 3.9% from March’s 3.8% whilst wage growth slowed (from 4.1% y/y to April’s 3.9%).^[iii]

Many commentators we follow portrayed this relatively weaker report as a clear positive. Since the Fed wants to see slower hiring, this report supposedly suggests it is getting what it wants. That allegedly increases the likelihood of a Fed rate cut sooner than later, which many headlines we saw celebrated as super bullish, as conventional wisdom holds lower rates boost economic growth—and, therefore, stocks.

Yet this commentary also comes just after many of the same observers claimed relatively quick-rising labour costs in a separate series suggested higher for longer rates (i.e., US monetary policymakers would refrain from cutting rates).^[iv] The narrative—and associated expectations—are volatile, which we think readers can see by observing a gauge of 30-day fed funds futures pricing data—a market-based gauge of traders’ expectations for Fed policy rates.

Fed funds futures tracked by the CME FedWatch Tool suggest traders think rates are likely to be lower at some point this year.^[v] Whilst the tool suggests most don’t expect any change at the 12 June Fed meeting, the market-implied probability of a 25-basis point (bp, or 0.25 percentage point) cut at July’s get-together ticked up to 34% following the release of the US jobs report last Friday.^[vi] That figure rises to around 50% by September’s meeting and over 90% by yearend.^[vii]

But hold on! At 2024’s start, traders pegged a 0% probability of a 5.25% – 5.50% Fed target rate range (where it is now) at May’s meeting.^[viii] Instead, they thought the most likely target rate was 4.75% – 5.0%—amounting to a reduction of 50 bps from the beginning of the year.^[ix] The closer we got to May, though, the probability of no change rose—from 27% in February to 90% by mid-March.^[x] Note, too, just over the last couple of weeks, the futures-implied probability of rate cuts has gyrated wildly up and down.^[xi]

Now, we don’t think these probabilities really tell investors anything about the reality of what US monetary policymakers may do. The CME FedWatch Tool is a market-orientated gauge, which our research shows has a higher success rate of assessing future conditions than things like survey-based questionnaires.  But the CME FedWatch Tool isn’t gauging what the cabal of people who set rates think. It is what futures traders think they think, and it is subject to volatility. According to our research, monetary policy isn’t predictable, and monetary policymakers’ actions aren’t a market function.

Take labour data. Headlines presume US monetary policymakers are celebrating because their interest rate decisions are contributing to slower—but not contracting—economic growth. But is that conclusion truly assured? What if one Fed governor argues April’s employment figures shout mission accomplished but another may want to see more data (and June’s jobs report) before committing to cuts? What if another Fed policymaker interpreted the government hiring slowdown as the central cause for the weaker headline number—and decided to dismiss the report, since government employment says nothing of how America’s private sector, the economy’s growth engine, fared? Or what if policymakers decide the report on labour costs from earlier last week is more significant? Or other, non-employment-related data? We could go on—and that is a huge problem for those trying to divine when cuts come, in our view.

Beyond not being able to forecast policymakers’ decisions, monetary policy is only one economic input. Our research shows it isn’t all powerful, which one would think the last 18 months of widespread forecasts for a US economic downturn tied to monetary tightening—only for the economy to generally accelerate—would prove.^[xii] Could rate cuts help some areas? Sure, it is possible. But don’t overrate the effect. US gross domestic product (GDP, a government-produced measure of economic output) has grown in a variety of fed-funds rate environments—including the present!^[xiii] Stocks have shown the exact same thing since October 2022, with the early days of this rally far preceding material talk of rate cuts.^[xiv] Heck, the Fed was still hiking then. The evidence we need cuts today to support is flimsy, in our view.