Weekly Market Update: April 17, 2023
Nonfarm payrolls increased by 236,000 in March. That gain, though nominally below the consensus forecast of 238,000, pushed the estimated total number of jobs created in the first quarter above the one million mark. The unemployment rate was little changed at 3.5%. These figures raised sentiment that the Federal Reserve will hike the federal funds rate by a quarter point, to 5.00%-5.25%, at its May Federal Open Market Committee meeting. Prior to the labor report, calls for the Fed pausing its interest-rate actions were building.
There were aspects of the March employment report that the Fed had to like. In addition to the slowdown in the pace of monthly jobs creation, the average hourly wage figure rose just 0.3%, bringing the 12-month rate to 4.2%, the lowest since June, 2021. Likewise, the Consumer Price Index (CPI) data showed that price increases at the consumer level moderated in March. On a 12-month basis, the CPI rose 5.0%, which was a full percentage point below the February figure.
The Fed will likely continue to walk a tightrope in its fight against inflation. True, employment gains may give policymakers more wiggle room to raise rates. However, the central bank must guard against over-tightening the monetary reins and creating more stress in the banking, commercial real estate, and consumer credit card areas. In mid-March, federal regulators had to step in to resolve a liquidity crunch at a few regional banks in order to avoid a banking crisis contagion.
Then there is the impact higher borrowing costs are having on the U.S. economy. The housing market was the first area to feel the ill effects of elevated rates on demand, with home sales falling sharply. Likewise, manufacturing activity has contracted for five straight months and nonmanufacturing activity, though still expanding modestly, dropped nearly four percentage points, to 51.1%, in March. The recently commenced first-quarter earnings season will provide more insight into the health of the U.S. consumer. A recession in the near term is plausible.
Conclusion: With most signs pointing to the Fed raising rates into a period of slowing growth, we would continue to exercise caution on the investment front.