US - Labour market cooling, but still hot

Labour market is slowing only gradually

The unemployment rate declined one tenth, to 3.5% – close to its all-time low. Wage growth remained benign at 0.3% m/m (4.2% y/y), though we must add the caveat here that productivity has been very weak of late, meaning that unit labour cost growth has surged (meaning that the labour market still poses upside risks to inflation). The overall message is that the labour market is loosening, but remains exceptionally tight. Although markets reacted strongly to the steep drop in the JOLTS job vacancies on Wednesday, we interpret this data with caution given that similarly large declines in the past were subsequently revised away. The tendency for the JOLTS data to be revised may reflect that the survey response rate has fallen to a very low level of c.30% (i.e. the data is likely not as reliable as it used to be). A more gradual slowing in the labour market is visible in other data, including continuing jobless claims, and challenger job cut announcements (both of which have been rising but remain historically low).

Fed still to hike one last time

All told, the labour market is definitely on a cooling trajectory, though the pace of that cooling is still likely insufficient for the Fed to be comfortable that its inflation-fighting job is done. Our base case for the labour market sees jobs growth to continue to fall over the coming months, and for the unemployment rate to start rising in late Q2. We expect the Fed to hike rates one last time by 25bp in May, and for rates to stay on hold until December, when we expect the Fed to start cutting rates. This scenario assumes that the labour market continues to cool over the coming months, and that lending to the real economy is only moderately impacted by the recent turmoil in the banking sector.