The US labor market exceeds expectations with 272,000 new jobs in May

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The U.S. labor market added 272,000 jobs in May, far more than forecast, pushing back market expectations for the timing of the Federal Reserve’s rate cuts.

The Bureau of Labor Statistics figures match economists’ prediction in a Bloomberg poll of a 180,000 increase in nonfarm payrolls over the past month.

The data comes at a crucial time ahead of the November US presidential election between Joe Biden and his Republican challenger Donald Trump.

The US president hailed what he called “the great American comeback”, adding that unemployment has now been at or below 4 percent for 30 months – the longest stretch in half a century.

“On my watch, 15.6 million more Americans have the dignity and respect that comes with a job,” Biden said.

U.S. employers have consistently continued hiring — often well above expectations — despite a succession of interest rate hikes that have pushed borrowing costs to their highest levels in more than two decades.

But voters have so far been reluctant to give the president credit for the economy’s performance, and Biden’s electoral prospects could be boosted by rate cuts.

After the release of Friday’s figures, the probability of a rate cut during the Fed’s mid-September meeting – ahead of the elections – fell from 81 percent to 57 percent, depending on market prices.

The markets had already fully priced in an interest rate cut in November. After the jobs figures were published, that was pushed back to December.

“Strong job growth and rising wage inflation support our long-held view that interest rates will stay higher for longer,” said Torsten Slok, chief economist at Apollo Global Management. “We still expect the Fed to not cut spending in 2024.”

Government bond yields rose in response to the news, with the yield on two-year government bonds, which move with interest rate expectations and inversely with prices, rising 0.14 percentage points to 4.86 percent.

The dollar rose 0.7 percent against the euro to $1.081, while U.S. stocks were little changed on the day.

The figures come less than a week before the June meeting of the US central bank, when interest rates are expected to remain unchanged.

On the other hand, the European Central Bank cut interest rates this week for the first time in almost five years.

Strong U.S. wage data is part of a broader trend in advanced economies. Inflation has fallen more slowly than hoped in 2024 as robust labor markets support economic resilience.

The Fed, which now prefers an inflation measure of 2.7 percent compared to its 2 percent target, has taken a cautious approach to lowering borrowing costs.

Economists at Citigroup changed their expectations for rate cuts after the jobs report, betting the first step will come in September instead of July.

But Citi added that the report “does not change our view that labor demand, and the broader economy, is slowing,” arguing that this would prompt the Fed to cut rates by a total of 0 in September, November and December. 75 percentage points.

Friday’s figures showed average hourly wages rose 4.1 percent over the year to May, well above the rate central bankers say is consistent with hitting their inflation target.

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

Jason Furman, a former administration official now at Harvard University, said the increase in unemployment could be the most important part of Friday’s data release.

“If we wake up next month and the unemployment rate is 4.1 percent, I think that will happen [the Fed’s] attention,” Furman said. “If you have unemployment above 4, an interest rate cut would come into play sooner.”

The payroll number for April, previously estimated at 175,000, was lowered to 165,000.

“There is very strong job growth, but unemployment is up,” said Ryan Sweet, chief US economist at Oxford Economics. “It will be difficult for the Fed to make cuts in September, but I don’t think this report takes that off the table.”