Signs of Cooling US Labour Market Bring Some Relief
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Economics Research10 May 2024
  • US: We believe there is room for rate cuts as inflation and jobs momentum are on track to fade
  • Hong Kong: Better-than-expected growth mainly driven by strong net export of goods and services
  • Taiwan: We revise our full-year 2024 GDP growth forecast to 4.2%, buoyed by robust growth in 1Q24
  • Singapore: Rising FDI increasingly dominate overall gross capital inflows
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US: A year without rate cuts? Following the 30 Apr - 1 May meetings of the Federal Open Market Committee, markets were chastened. Comments from Chair Powell that there has lately been “a lack of further progress” towards the 2% inflation target pushed fixed income markets to pricing in no more than one rate cut this year. By the end of the week though, a weaker-than-expected nonfarm payrolls release for April and an uptick in the unemployment rate brought back two rate cuts to the price. US job growth totalled 175,000 in April, much less than expected, while unemployment rose to 3.9%.

Like the US Federal Reserve, markets are set for several months of wait and see, with the key issue being the noise associated with inflation. The other issue is the labour market, though we do not see a great deal of noise there. The red-hot jobs market of 2022/23 may be behind, and some weakness has crept up in some segments (construction and retail), but overall market dynamics are still positive. The April payrolls figures that pleased the markets on Friday largely reflect a slowdown in government hiring, which, in our view, does not reflect a dawning of a new trend. With no fiscal tightening measure in the pipeline and outlays from recent years’ large infrastructure bills still percolating through the economy, public sector hiring is not about to fade.

How do the inflation and labour market developments align with two rate cuts in 2H24? So far, quite well, in our view. A little bit of disinflation in oil (already underway) and rentals (downtrend has emerged) will help restore the Fed’s confidence about inflation heading toward 2%, which could be further supported by marginal softening of jobs demand in the coming months.

But there is an emerging scenario under which energy and rental costs do not ease much, and neither does the labour market. Between Middle East tensions and Washington’s sustained fiscal support for the US economy, the idea of very little disinflation and no further weakening of the jobs market is hardly outlandish. We will assign this scenario a probability of 25%. Under this scenario, the Fed will remain on wait-and-watch for the rest of the year, eager but incapable of implementing rate cuts. We see considerable bond and currency market volatility in this scenario, a preview of which was amply visible in the last week of April. We think it could be a bumpy ride.

Figure 1: US economy added fewer jobs than expected in April while the unemployment rate rose


Source: US Bureau of Labour Statistics, DBS



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