The U.S. economy added back 431,000 jobs in March as the unemployment rate slid to 3.6% — just above pre-pandemic lows. After the jobs report showed a further tightening of the labor market, the Dow Jones industrial average dipped into negative territory, then rallied to close slightly higher. That's despite a key part of the Treasury yield curve inverting, as investors price in rising expectations for a series of big Federal Reserve rate hikes.
Private-sector payrolls rose 426,000 in March, while government jobs rose 5,000.
Wall Street had expected the March jobs report to show a bigger gain of 490,000 jobs, including 458,000 in the private sector. However, job gains for January and February were revised up by 95,000. The initially reported gain of 678,000 jobs in February was revised to 750,000.
Economists expected the unemployment rate to ease to 3.7% from 3.8%.
The average hourly wage rose 0.4% on the month, while rising 5.6% from a year ago, topping expectations of 5.5% annual wage growth.
While wage gains are very strong, they're not keeping up with inflation. The annual CPI inflation rate hit 7.9% in February. The inflation rate most closely watched by the Federal Reserve, the PCE price index, hit a 40-year high 6.4%, the Commerce Department said Thursday. The lower PCE inflation rate partly reflects its broader base, which includes prices paid by government health care programs.
Dow Jones, Treasury Yields React To Jobs Report
After the jobs report, the Dow Jones rose 0.4% in Friday's stock market action, after falling into negative territory earlier in the session. The S&P 500 rose 0.4%. The Nasdaq composite edged up 0.3%, after a firmer morning rally faltered.
The stock market rally is built on hope that the Federal Reserve can rein in inflation without tipping the U.S. economy into a recession. Yet that sanguine outlook depends on how much and how fast the Fed has to tighten monetary policy. Friday's jobs report bumped up the odds that the Fed will hike its benchmark interest rate a half-point at the next meeting, May 3-4.
The CME Group FedWatch page now shows 75% odds of a 50-basis-point hike, up from 70% yesterday. But the big change is that Wall Street now expects half-point hikes at the June and July meetings also. Odds that the Fed's key rate will rise at least another 1.5 percentage points by the July meeting are now at 61.5% vs. 43.5% the prior day and 0% a month ago.
As of Thursday, the S&P 500 and Dow Jones had climbed to within 5.5%-6% of all-time closing highs. The Nasdaq, after sinking into bear-market territory with a 20%+ drop, now stands 11.4% off its peak close. The Nasdaq has underperformed the Dow and S&P, as growth stock valuations have been pinched more by rising interest rates.
The 10-year Treasury yield rose 6 basis points to 2.38% after Friday's jobs report. However, the two-year Treasury yield shot up to 2.45%, overtaking the 10-year and inverting a key part of the yield curve.
A yield-curve inversion, with short-term rates rising above long-term rates, often points to an economic slowdown and potential recession. But investors shouldn't get spooked by the flat yield curve, Deutsche Bank strategist Maximilian Uleer wrote this week. For one thing, the 10-year Treasury yield has risen, not fallen, which suggests a relatively firm growth outlook.
He notes that five of six yield-curve inversions preceded a recession, though that includes the 2020 recession triggered by Covid. In those five instances, it has taken 7 to 34 months from inversion to recession's onset. He calls yield-curve inversions a "poor indicator of timing."
That also applies to the S&P 500. In all six cases, the S&P 500 continued to rally after the inversion, peaking 3 to 25 months later, Uleer writes. The average S&P 500 gain: 19%.
Be sure to read IBD's The Big Picture column after each trading day to get the latest on the prevailing stock market trend and what it means for your trading decisions.
Jobs Report Details
The leisure and hospitality sector added 112,000 jobs. Factory employment grew by 38,000.
Construction jobs rose by 19,000. Health care and social assistance payrolls rose 33,000. Retailers added 49,000 jobs.
Unemployment Rate
The household survey, which is used to derive the unemployment rate, showed the ranks of the employed rising by a strong 736,000. The number of people participating in the labor force, meaning they're working or actively looking for a job, rose 418,000, not enough to keep the unemployment rate from sliding.
The share of the working age population (age 16 and up) participating in the labor force rose to 62.4%, matching expectations.
According to the monthly survey of households, 5.95 million Americans are unemployed. That's only up modestly from 5.8 million unemployed in February 2020.
Fed projections show the unemployment rate easing to 3.5% this year and holding there, then rising slightly to 3.6% in 2024. That would, indeed, constitute a soft landing. However, every drop in the unemployment rate from current levels will raise the odds that the labor market will overshoot Fed projections.
That's what Jefferies chief U.S. financial economist Aneta Markowska expects. "With (the) unemployment rate likely to fall to 3% by the end of the year, we expect wage growth to accelerate to about 6%," she wrote on March 25.
That would raise the risk of a wage-price spiral, as workers use the tight job market to leverage pay increases that aren't eroded by inflation, but businesses pass along those extra costs with more price increases.
To achieve the soft economic landing that the Fed wants, a lot more nonworkers will have to come off the sidelines, helping take some steam out of wage growth.
Please follow Jed Graham on Twitter @IBD_JGraham for coverage of economic policy and financial markets.
