Blowout May Jobs Data 'Closes The Door On A July Rate Cut': 6 Economists Make Best Guesses On Fed's Next Move

The U.S. labor market showcased its resilience in May, with nonfarm payrolls surging by 272,000, far surpassing the anticipated 180,000.

The upper range among economist predictions, as compiled by Econoday, was 225,000, so even the most optimistic forecasters had not anticipated the booming employment growth seen in Friday’s data.

This robust increase occurred despite the unemployment rate inching up from April’s 3.9% to 4%.

Average hourly earnings also came in hotter than expected, rising 4.1% year-over-year, which contributed to a significant increase in Treasury yields and a rally in the U.S. dollar index.

As yields rocketed, long-dated bonds tanked, with the iShares 20+ Year Treasury Bond ETF TLT down 1.8%, eyeing its worst session in two months.

Gold also heavily dropped, pressured by rising Treasury yields and a strengthening dollar, with the SPDR Gold Trust GLD, tanking 2.5%, on track for its sharpest drop since February 2023.

Strong Demand And Fed Policy Implications

"This is a very strong report on the demand side," economist Mohamed El-Erian said on Bloomberg.

The robust data effectively “closes the door on a July rate cut” by the Federal Reserve, El-Erian said. He emphasized that there is no possibility for the Fed to cut or even signal a cut in July, and he expects Fed Chair Jerome Powell to maintain maximum flexibility and data dependency.

El-Erian also warned that keeping rates higher for an extended period could heighten the risk of a hard landing in the future.

Will Fed Hold Rates Until December?

Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, said the headline unemployment figure, now at 4%, might draw significant attention. The more crucial data point is the unexpectedly high number of jobs created, he said.

Zaccarelli expressed concerns for inflation watchers, particularly the Federal Reserve, suggesting that persistent wage pressure could prolong inflation.

"We believe that the Fed is on hold at least until the election," he said, adding that a possible rate cut in December remains his base case.

Payroll Report’s Impact on Treasury Yields, Futures

Quincy Krosby, chief global strategist for LPL Financial, said the payroll report indicates a more resilient labor market than expected, with work week hours also higher.

"The payroll report suggests a more resilient labor market than forecast," she said, noting the resulting jump in Treasury yields and decline in equities. This resilience led to diminished expectations for a September rate cut, Krosby said.

The inflation report next week will be critical, as it could significantly influence the Fed’s policy decisions, she said.

Trimming Rate Cut Expectations

Larry Tentarelli, chief technical strategist for Blue Chip Daily Trend Report, said that the addition of 272,000 jobs in May effectively removes any possibility of a July rate cut.

He viewed the report positively for economic growth but noted that it would likely maintain upward pressure on bond yields and reduce expectations for Fed rate cuts.

"Based on current data, the earliest that we would expect a first rate cut is in September," Tentarelli said, adding that this is contingent on core personal consumption expendures dropping to 2.4% or lower or the unemployment rate rising above 4.2%.

Conflicting Signals In The Labor Market

Charlie Ripley, senior investment strategist for Allianz Investment Management, said the May employment report delivered mixed messages.

While payrolls and wage growth were strong, the rise in the unemployment rate was unexpected, he said. Recent job growth has been concentrated in part-time positions, with a decline in temp jobs indicating a cooling labor market, he said.

"From a headline perspective, today's nonfarm payroll figure outpaced all expectations," Ripley said, but he anticipated the Fed would hold interest rates steady in the upcoming meeting. He suggested that sustained cooling in core inflation could prompt a rate cut in September.

‘A Rorschach Test’

Bill Adams, chief economist for Comerica Bank, characterized the May jobs report as a Rorschach test, presenting both positive and negative aspects.

"Solid growth of payrolls and wages, but unemployment rose too," Adams said. Strong payroll and wage growth suggest a hot labor market, while rising unemployment and a shift toward part-time jobs hint at cooling conditions.

Adams expects the Fed to maintain interest rates for now but sees the potential for a rate cut in September if core inflation continues to decline.

Most Fed policymakers view the robust payroll growth and wage increases as indicators that immediate rate cuts are unnecessary, while rising unemployment might eventually lead to moderated inflation, he said.

Read now: Wall Street Reacts To Hot Jobs Report: Stocks Swing As Traders Abandon July Rate Cut Hopes

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