Stronger-than-expected US labor market data has dampened hopes the Federal Reserve will start cutting interest rates this quarter, with market watchers now not expecting to see cuts until at least September.
Data from the Bureau of Labor Statistics released on Friday morning showed the labor market remains strong, adding 303,000 nonfarm payroll jobs last month, significantly higher than the 214,000 expected by analysts.
Job gains were seen in healthcare, government, and construction.
The unemployment rate decreased month-over-month from 3.9% to 3.8%.
Meanwhile, wages, a key measure of inflationary pressures, increased by just 4.1% year-over-year in March, marking the lowest annual increase since June 2021.
Kathleen Brooks, research director at XTB, said that this labor market data does not shift the dial for the Fed.
At the conclusion of its last rate-setting meeting on March 20, the Fed stuck with its forecast of three interest rate cuts by the year-end.
At the time, Fed chair Jerome Powell said continued strength in the labor market alone would not be a reason to hold off lowering interest rates.
Brooks said that the market is now expecting the Fed’s first rate cut to come in September, instead of June. The expectation of two rate cuts and a high chance of a third cut by the year-end remains unchanged for now, she added.
“Although Consumer Price Index (CPI) data will also be watched closely, this supports the Fed holding off from rate cuts in the first half of the year, and potentially waiting until later in the year, as the economy remains extremely strong,” Brooks said.
Nigel Green, CEO of financial advisory and asset management firm deVere Group, however, predicts that there will be at most a single interest rate cut by the Fed this year.
Green believes the latest jobs report when combined with a recent slew of data which has sown inflation remains sticky supports their expectation that the Fed will be cautious with rates.
“We expect that there will be a maximum of one rate cut this year – in the third quarter – followed by a pause in order to reassess the impact on the world’s largest economy,” Green said.
”As interest rates are likely to remain elevated for a longer duration than previously anticipated, investors need to recalibrate their portfolios to mitigate risks and capitalize on emerging opportunities.”
He said that investors should consider reallocating their portfolio to sectors that typically perform well in a rising interest rate environment, historically sectors such as financials, industrials and materials.
“Conversely, sectors that are sensitive to interest rates, such as utilities, real estate, and consumer staples, may face challenges in a higher-for-longer interest rate environment,” Green said.
“Utilities and real estate companies, for example, often carry significant debt loads, making them vulnerable to rising borrowing costs. Similarly, consumer staples companies may experience pressure on profit margins as borrowing costs increase.”
Green concluded: “As we expect a maximum of one rate cut in 2024, investors might need to adjust their portfolios to adapt to the higher-for-longer environment to mitigate risk and to jump on the opportunities.”
Stock market reaction
US stocks edged higher following the hot jobs report, with the Nasdaq up 0.6%, the S&P 500 up 0.5% and the Dow Jones gaining 0.2% shortly after the market opened on Friday.
“The stock market reaction could be in response to the labor market indicating that the US economy is in a strong position, which is positive for corporate profits down the line,” XTB’s Brooks commented.
“However, we expect stocks to be volatile in the short term as the market tries to figure out what it means for stocks if interest rate cuts aren’t coming until autumn.”