• Investors welcomed the dip in hourly earnings and signs of a cooling U.S. job market, suggesting lower inflation and a moderating labor strength.
• The Fed is expected to start reducing rates later this year, possibly beginning with the June meeting.
• The S&P 500 is close to record levels, having risen almost 25% since late October without dropping 5%^[1] or more.

This past week, markets digested several data points that indicated the U.S. labor market may be showing early signs of weakening.

The most visible of these was the February U.S. nonfarm jobs report, which was somewhat mixed.

While the headline number of jobs added was above expectations, underneath the surface, there were signals of softness.

Last month’s figures were revised substantially lower, the unemployment rate ticked higher to 3.9%^[2], and average hourly earnings moderated from 4.5% year-over-year to 4.3%.

The U.S. unemployment rate rose to its highest level in two years.

Source: Fred

The U.S. nonfarm jobs report from last week presented a mixed picture but generally indicated a cooling labor market.

February saw 275k jobs added, surpassing the anticipated 200k, yet the previous month’s numbers were significantly adjusted down from 353k to 229k.

January’s Job Openings and Labor Turnover Summary (JOLTS) data indicated a continued cooling trend, with job openings decreasing to 8.9 million, a notable drop from the peak of 12.2^[3]million in March 2022.

Source: Fred

Similarly, the quits rate, representing employees voluntarily leaving their jobs, fell to a recent low of 2.1%.

Job openings and quits rate are key predictors of employment demand and wage pressure, both of which appear to be softening.

As more individuals re-enter the job market, the labor supply is gradually increasing, while labor demand shows signs of cooling, highlighted by the reduction in job openings.

This dynamic is expected to gradually slow wage increases and could slightly raise the unemployment rate over time, though the labor market remains fundamentally strong.

Implications of cooling labour market for The Fed and the Markets

Federal Reserve Chair Jerome Powell’s recent testimony to Congress suggested the Fed is close to having the assurance required to start reducing interest rates.

Source: CME FedWatch

The recent labor market data, indicating slower wage growth and a softer labor market, likely adds to this assurance by supporting the prospect of easing inflation.

Consequently, financial markets anticipate approximately four rate cuts in 2024^[4], with a significant chance of one occurring as soon as June.

This expectation is in harmony with the projection of three to four rate cuts beginning around June.

S&P 500 reaching all-time high

With every passing month, the US economy appears to have increasingly pulled off the “soft-landing” that economists so desired when the Federal Reserve began its battle against inflation back in March 2022.

Equity markets might be heading towards a consolidation phase or a slight decline, but a deep or extended downturn seems unlikely, as key fundamentals are still strong.

Inflation is expected to decrease slowly, though not consistently. The Federal Reserve is anticipated to begin lowering interest rates later this year, and despite potential softening, the labor market is expected to stay relatively robust, with unemployment staying below 4.5%.

These factors collectively suggest limited potential for a severe correction or a bear market involving a decline of 20% or more.

Investors can long the S&P 500 using our 3x US 500, 5x US 500.

Alternatively, traders can short the S&P 500 using our -3x US 500.

1. Tradingview
2. FRED
3. FRED
4. CME FedWatch