US labour market powers past expectations with 272,000 jobs added in May

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The US labour market added 272,000 jobs in May, far more than forecast, pushing back market expectations for the timing of Federal Reserve rate cuts.

The figures from the Bureau of Labor Statistics compare with economists’ expectations in a Bloomberg poll of a 180,000 rise in non-farm payrolls for last month.

The data comes at a critical time ahead of this November’s US presidential election between Joe Biden and his Republican challenger Donald Trump.

Biden’s administration is keen to advertise jobs growth during his presidency but would also benefit from interest rate cuts from the current 23-year high of 5.25-5.5 per cent.

After the data release, the chances of a rate cut ahead of the election, at the Fed’s mid-September vote, fell from 81 per cent to 61 per cent, according to market pricing.

Markets had previously fully priced in an interest rate cut by November. After the jobs figures were published, that was pushed back to December.

“Strong job growth and rising wage inflation supports our long-held view that interest rates will stay higher for longer,” said Torsten Slok, chief economist at Apollo Global Management. “We continue to expect no Fed cuts in 2024.”

Treasury bond yields surged and US stocks opened lower in response to the data. The S&P was down 0.1 per cent shortly after the opening bell, while the tech-heavy Nasdaq Composite was down 0.2 per cent.

The two-year Treasury yield, which moves with interest rate expectations and inversely to prices, rose to a high of 4.88 per cent after the release. The dollar rose 0.6 per cent against the euro to $1.083.

The data comes less than a week before the US central bank’s June meeting, when it is expected to keep interest rates on hold.

US inflation has proved more obstinate than previously thought and the Fed has taken a cautious approach to lowering borrowing costs.

The central bank’s inflation target is 2 per cent. The personal consumption expenditures index, the Fed’s preferred metric for price pressures, is now 2.7 per cent.

Following the jobs report, Citi economists changed their rate cut expectations, betting that the first move will come in September rather than July.

“We are shifting our base case for a first rate cut from July to September on well-above-consensus 272,000 new jobs in May,” the bank said. “We now expect 75 basis points of total cuts this year in September, November and December.”

But it added that the report “does not change our view that hiring demand, and the broader economy, is slowing”, and that this would prompt the Fed to begin a series of cuts in the next few months.

Friday’s figures showed that average hourly pay was up by 4.1 per cent in the year to May, significantly above the levels central bankers see as consistent with hitting their inflation target.

However, the unemployment rate also rose, to 4 per cent from 3.9 per cent.

The payrolls number for April, previously estimated at 175,000, was downgraded to 165,000.

“There’s very strong job growth, but the unemployment rate did tick up,” said Ryan Sweet, chief US economist at Oxford Economics. “For the Fed it is going to be a close call if they can cut in September, but I don’t think this report takes that off the table.”