BeiChen Lin | Source | Investment Strategist at Russell Investments

Quotable comments – May Jobs Report Preview
“This jobs report will likely be pivotal as investors try to navigate through the macroeconomic uncertainty. The U.S. economy saw three consecutive months of hotter-than-expected job creation in the first quarter, followed by a slightly soft but still robust pace of job creation. If Friday’s job creation number comes in at or below consensus expectations, it will be another indication that economic growth will likely soften this year, and that the Fed should be in a position to cut rates later this year. In our base case soft-landing scenario, we envision the Federal Reserve making the first cut in September, and then proceeding with rate cuts at a quarterly pace.”

“Fed officials continue to stress of wanting to see the labor market normalize more. A key part of that equation is wage growth. Although the average hourly earnings data can be more volatile than other measures like the Atlanta Fed Wage Tracker or the Employment Cost Index, it is also one of the timeliest measures. If average hourly earnings come in at or somewhat softer than consensus expectations, that would be another positive sign.”

“For many months in the past, hiring in so-called ‘catch-up’ sectors like Health Care and Leisure/Hospitality have been key contributors to U.S. job creation. We are going to be closely watching the sector decomposition of the job creation, to see if the ‘catch-up’ begins to cool.

“The market reaction to the jobs data will be interesting. If job creation comes in softer than expected, then that could help reinforce optimism that the Fed can cut interest rates this year and cause a short-term equity market bounce. But, if job creation comes in too soft, then equity investors might start worrying about recession risks again, and you could see a noticeable market correction. Exactly what number (on job creation) marks the boundary between soft vs too soft is hard to anticipate in advance. Combined with a backdrop where U.S. equity valuations are somewhat stretched, and equity sentiment is directionally overbought, we think investors should stick close to their strategic asset allocations, rather than make tactical bets on U.S. equities.”

“Some of the recent softness in economic data has led to 10-year U.S. treasury yields falling from around 4.6% to 4.3%. But even at current yields, we still see good value in U.S. treasuries. And with recession risks not completely off the table just yet, we think that investors may benefit from holding a somewhat higher proportion of longer-term U.S. treasuries within the bond portion of their portfolio.”

Quotable comments – April Payrolls Preview
“The pace of growth in average hourly earnings is probably an even more important watchpoint than overall job creation. If wage pressures come in hotter than expected, that could put the Fed in a bind.”

“Markets are expecting around 250,000 jobs to be added to the U.S. economy in the month of April. Although that would be a step down from March, it’s still a very rapid pace of job creation. With the market already fretting about interest rates being ‘higher for longer,’ even a slight upside surprise to job creation might be enough to frighten investors.”

“Delays in aircraft deliveries are causing operational hiccups for some airlines. This may lead to some near-term headwinds for airline hiring, despite the leisure & hospitality sector total employment still being in ‘catch-up’ mode.”

Quotable comments – May FOMC Preview
“I think Chair Powell may heed the ‘silence is golden’ maxim at this week’s press conference after its May Fed meeting. He’ll likely to try to say as little as possible about when he expects the first rate cut to come in order to preserve optionality.”

“Amid a backdrop of disappointing inflation headlines in Q1, some market participants have become more worried about inflation ‘getting stuck.’ But we do not share those concerns. At the end of the day, much of the inflation surprise in Q1 came from volatile categories like transportation services. Meanwhile, wage pressures, which have been a focal point of the Fed, moderated in Q1, and are likely to continue easing into 2024 as the labor markets further normalize. Since wages are a key input cost for many services businesses, a cooling in wage growth can also help lower overall price pressures.”

“Markets have been aggressively slashing their expectations for Fed rate cuts this year. The market is now pricing in only around 30bps of interest rate cuts, and some observers are even worried that the Fed might not be able to cut interest rates at all this year. But even with the upside surprise to inflation in Q1, we still think the Fed will be in a position to cut interest rates this year, likely in September and December.

“Despite the upside surprise to inflation in Q1, I think the probability of the Fed having to raise interest rates some more is very, very low. I wouldn’t be surprised if Powell gets asked that question at the press conference, and how he answers it could create some market volatility.”

“The Fed will likely announce a reduction in the pace of Quantitative Tightening to take effect in June. The Fed has indicated that the primary tool for monetary policy is still the Federal Funds rate, so if there isa surprise in the pace of QT, I would ascribe that more to technical reasons around needing to maintain ample reserves instead of reflecting a change in the Fed’s monetary policy views.”