Featured in the report
- The U.S. Federal Reserve (Fed) left the target range of the Fed Funds rate unchanged at the conclusion of its April 30-May 1 monetary policy meeting. While the decision was widely anticipated, investors were keen to learn how monetary policy may evolve from here on out.
- U.S. job cuts decreased by 28% month-over-month (MoM) in April according to a report by Challenger, Gray & Christmas. Notably, the automotive sector, including significant layoffs at Tesla, dominated April job cuts. The report also showed U.S. employers planned to hire just 9.8k workers in April, the lowest monthly total since April 2013.
Chart of the day
U.S. job openings declined in March
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Market spotlight
U.S. – FOMC Decision Recap
The U.S. Federal Reserve (Fed) left the target range of the Fed Funds rate unchanged at the conclusion of its April 30-May 1 monetary policy meeting. While the decision was widely anticipated, investors were keen to learn how monetary policy may evolve from here on out. Specifically, a string of higher-than-expected inflation readings has led to concerns that the Fed’s next move could be a policy rate hike. While Chair Jerome Powell flagged concerns about lingering price pressures, he viewed the current monetary policy stance as sufficiently restrictive to restore price stability over the long haul. Rather, officials deem it would be more appropriate to maintain the target range of the Fed Funds rate at its current level to bring inflation back to the central bank’s long-term 2% target.
Notably, officials also outlined plans to slow the pace of balance sheet run-off starting in June. The Fed’s balance sheet had ballooned to nearly US$9 trillion in 2022, more than double the level seen at the end of 2019. Since then, officials have allowed some of their holdings of Treasuries and mortgage-backed securities to roll off in a process known as quantitative tightening (QT). Specifically, the maximum amount of Treasuries that the Fed will allow to run off its balance sheet will be reduced to US$25 billion per month from US$60 billion beginning in June. The cap for mortgage-backed securities will remain unchanged at US$35 billion per month. Chair Powell indicated that by moderating the pace of balance sheet contraction, the Fed may be able to reduce the size of their overall holdings by a greater degree without causing market disruption similar to what had occurred in the previous instance of QT in 2019.
The market reacted positively to Chair Powell allaying concerns about the possibility of further policy rate hikes. Still, higher-than-expected inflation readings have shaken the Fed’s confidence on near-term policy rate cuts. Mr. Powell acknowledged as much, saying that gaining sufficient confidence to loosen the monetary policy stance “will take longer than previously anticipated.” At the time of this writing, the Fed funds futures curve suggests the Fed may cut rates once or twice this year, a far cry from the 6 cuts anticipated at the start of the year (see Chart of the Day).
U.S. – Labour Market Data
U.S. job cuts decreased by 28% month-over-month (MoM) in April according to a report by Challenger, Gray & Christmas. Notably, the automotive sector, including significant layoffs at Tesla, dominated April job cuts. The report also showed U.S. employers planned to hire just 9.8k workers in April, the lowest monthly total since April 2013. Year-to-date, employers have announced plans to hire ~46.6k workers, the lowest total in the first four months of the year since 2016. In a separate report, U.S. unit labour costs rose at a 4.7% quarter-over-quarter (QoQ) rate in 1Q24, above the median consensus estimate of 4.0% and the highest in a year. In the past, unit labour costs have been a good guide to the direction of core inflation. The 1Q24 gain is further evidence that progress toward the Fed’s 2% inflation target has likely stalled. Meanwhile, productivity rose at a 0.3% QoQ annualized rate in 1Q24 after an upwardly revised 3.5% gain in the prior period, data from the Bureau of Labor Statistics showed. Notably, quarterly productivity figures are often quite volatile, but the QoQ rise in productivity in 1Q24 is still well within the bounds of the usual volatility and follows a three-quarter spurt over which growth averaged 3.8%. However, if productivity growth weakens from here while unit labour costs remain elevated, it can add to the pressure on firms to pass on production costs to consumers or reduce headcount. Neither choice would be favourable for the Fed’s dual mandate of maximum employment and stable prices.
Market wrap
U.S. equities advanced as investors digested the latest U.S. Federal Reserve (Fed) decision to keep interest rates unchanged and look ahead to corporate earnings and labour market data. In the press conference, Fed Chair Jerome Powell did not indicate when the Fed might begin lowering borrowing costs. Investors still expect one to two rate cuts by the end of the year. Meanwhile, the yen strengthened amid assumptions that the Bank of Japan had stepped in to support its currency for the second time this week. This could signal that Japanese authorities could take a more aggressive stance in supporting the yen going forward. In commodities, oil recovered yesterday’s losses, and gold fell.
Fixed Income
U.S. Treasury yields are little changed this morning, following a volatile session yesterday that saw some earlier gains reversed following the FOMC rate decision and Chair Powell’s press conference. As expected, the Fed kept rates unchanged, with investors projecting one rate cut by yearend. Chair Powell acknowledged that inflation has been rising beyond expectations, but he pointed out that a rate hike is unlikely as the central bank deems current rate levels restrictive. Higher-for-longer scenario is still in play, subject to a solid labour market and resilient economy. Activity in the primary credit markets took a pause yesterday and is expected to resume today, albeit at a somewhat moderated pace. All eyes are now on the latest nonfarm payroll read due tomorrow.
Markets snapshot
Notable data releases
Notable earnings releases
