Another 223,000 was added to US employment in April and the unemployment rate declined one notch to 5.4% . The net revision to March and February was -39,000. This leaves three-month average monthly job growth at 191,000, which is just below the pace we think marks the threshold for a first Fed funds rate hike. However, if we are right that US economic growth will rebound this quarter, the pace of job growth should remain above 200,000 in coming months.
The general divergence in strength between the service and goods producing sectors was also evident in the April jobs data. Goods-producing industries added 31,000 new jobs with continued declines (-15,000) in mining and logging, which reflects the weakness in the oil and gas extraction sector, and only +1,000 in average job gain over the past three months in the manufacturing sector (which has been hurt by weaker global demand and a stronger US dollar). Construction showed a significant rebound to 45,000 after the weather-induced weakness last month. The service sector is in better shape and private service providing industries added 182,000 jobs in April while the government sector added 10,000.
Average hourly earnings were a bit disappointing after the Q1 employment cost index suggested an upward trend in wages . Average hourly earnings were up 0.1% m/m in April and were revised down to 0.2% (from 0.3%) in March. This leaves hourly earnings up 2.2% y/y, which is basically the same pace as over the past two years.
The participation rate increased to 62.8% (it has basically been flat for the past six months) and the underemployment rate declined to 10.8%, a continuation of the recent downward trend.
Markets reacted by sending US rates lower. It is likely expectations on job growth were lifted by the release of strong jobless claims data on Thursday and there was some payback after the increase in yields over the past one and a half weeks. Looking ahead, we continue to expect a first Fed funds rate hike in September, which is earlier than the current market pricing of a December hike . More important though, the pace of rate hikes implied by market rates is in our view too slow. Thus, we expect history to repeat itself and rates to move higher across the curve in coming months, most pronounced in the 2-5Y segment, as we move closer to the first rate hike.
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