US labor market exceeds expectations by adding 272,000 jobs in May

The US labor market surprised economists in May by adding 272,000 jobs, far exceeding the expected 180,000 rise in non-farm payrolls. This unexpected surge in job growth has shifted market expectations for Federal Reserve rate cuts, with the chances of a cut ahead of the November presidential election decreasing from 81% to 61%.

The data release has also impacted the dollar, which rose 0.5% against the euro, reaching $1.083. Roger Aliaga-Diaz, Vanguard Americas chief economist, commented that the strong job growth indicates that inflation is unlikely to drop below 2.8 or 2.9% by December, making it challenging for the Fed to justify a cut before the end of the year.

Previously, markets had fully priced in an interest rate cut by November, but after the release of the job figures, that expectation has been pushed back to December. Treasury bond yields surged, and stock futures turned red in response to the payrolls data, with the two-year Treasury yield rising to 4.86% after the release.

Torsten Slok, chief economist at Apollo Global Management, stated that the strong job growth and rising wage inflation support the view that interest rates will remain higher for longer, predicting no Fed cuts in 2024. The release of the data comes just before the Fed’s June meeting, where they are expected to keep interest rates steady.

Despite the positive job growth, the US unemployment rate rose to 4% from 3.9%, and the payrolls number for April was revised down to 165,000 from the previous estimate of 175,000. Ryan Sweet, chief US economist at Oxford Economics, noted that while there is strong job growth, the increase in the unemployment rate leaves the possibility of a Fed cut in September still on the table.