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- The US added 272,000 jobs in May, blowing past consensus estimates by a wide margin.
- The red-hot data all but eliminates the possibility of a July interest-rate cut.
- Some analysts are questioning the Fed's ability to lower rates this year at all.
The latest jobs report has all but confirmed the Federal Reserve won't cut interest rates in July.
While the highest-probability scenario coming into the report called for an initial cut in September, July was still considered to be on the table. Odds had crept higher after a series of recent economic data suggested a cooling labor market and subsiding inflation.
That's off the table now after the US added a blowout 272,000 jobs in May, rocketing well past the consensus estimate of 182,000, and exceeding all 77 forecasts collected by Bloomberg. Wage growth also surprised to the upside, with average hourly wages rising 0.4% last month.
"Today's data undermines the message that other recent economic data have been giving of a cooling U.S. economy, and slams the door shut on a July rate cut," Principal Asset's Chief Global Strategist Seema Shah said, adding: "We still expect the Fed to cut rates in September but another set of prints like today's would likely also take that off the table."
Investors now indicate just a 9% odd chance of a July cut, down roughly half from where it was before the jobs report. What's more, for some experts, doubt is creeping in over the Fed's ability to lower rates in September.
Jeff Schulze, head of economist market strategy at ClearBridge investments, is taking it out of play.
"Combined with an upside surprise to wages, this effectively takes a September rate cut off the table as there is no concern on the full employment side of the Fed's dual mandate at the moment," he said.
The hot jobs number was also felt in stocks, which declined sharply amid the decreased prospects of an imminent rate cut. Treasury yields spiked more than 10 basis points.
"To those who are worried about inflation — especially the Federal Reserve — the report should raise concerns that wage pressure and sticky inflation is more likely to persist than be transitory," said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance. "We believe that the Fed is on hold at least until the election and may very well skip rate cuts for the entire year (our base case is still one 25 bps rate cut in December)."
Correction: June 7, 2024 — An earlier version of this story included a miswording in a quote, which read "rate hike" instead of "rate cut"; it has been updated to the latter.