Cooling Labour Market Boosts Rate Cut Hopes, Leading to Rally in US Stocks

In a surprising turn of events, US stocks surged after a critical jobs report fell short of expectations, fueling hopes for potential interest rate cuts later in the year. The US added 175,000 jobs in April, significantly lower than the 241,000 forecast in a Bloomberg poll and the smallest increase in six months.

This unexpected slowdown in job creation led to a 1.3% gain for the S&P 500 index, marking its best day in over two months. Federal Reserve chair Jay Powell’s announcement that interest rates would remain at a high of 5.25-5.5% for an extended period also contributed to the positive market sentiment.

Investors were relieved by Powell’s statement that it was “unlikely” the next rate move would be higher, prompting futures market traders to adjust their expectations for the Fed’s first rate cut to September, instead of November. The market now anticipates almost two quarter-point cuts this year.

Despite the slight rise in unemployment to 3.9%, revisions to previous job data revealed a weaker labor market performance than previously reported. The report highlighted a slowdown in job creation in sectors like leisure, construction, and government, while healthcare and retail remained strong.

Economists like Paul Ashworth and Michael Feroli believe that the cooling labor market could pave the way for rate cuts in the near future, depending on inflation data. However, concerns about the economy overheating have been alleviated, providing some relief for the Fed.

President Joe Biden seized the opportunity to tout the resilient economy under his administration, attributing the positive job report to his economic policies. With the US election looming, the impact of these potential rate cuts on the economy remains to be seen.