With job gains slowing, Wall Street unsure where to go

MANHATTAN (CN) — With the labor market continuing to cool — but, critically, not freeze — investors treaded water this week, with the Federal Reserve giving no reason for bulls or bears to jump out in front.

The Dow Jones Industrial Average and S&P 500 both ended the week lower than they did last week, losing 364 points and 14 points, respectively. The Nasdaq looked primed for a better outing but also ended up down 189 points for the week.

Hawkish comments by Federal Reserve Chair Jerome Powell, made during his semiannual report to Congress on Wednesday, did not did not move markets much and gave no real meat on when rate cuts could be coming.

“We believe that our policy rate is likely at its peak for this tightening cycle,” he said. “If the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year.”

The Fed remains focused on inflation, which has not yet dropped to the 2% goal, though it's also watching for signs that the labor market is suffering or a recession is on the way.

Powell told lawmakers that “there’s no evidence or nor reason to think the U.S. economy is in, or in some kind of short-term risk of falling into recession,” though he said the possibility is always there.

The comments were seen as hawkish by many experts, who believe the Fed now will cut rates in June. For 2024, many predict 100 basis points in total cuts.

“The Fed can afford to sit on higher rates until the labor market starts to crack,” said Jamie Cox, managing partner at Harris Financial Group, noting that maximum employment is strong enough now to not force the issue.

On Friday, markets continued to post gains after the Bureau of Labor Statistics revealed the U.S. economy added 275,000 jobs last month, far more than expected but significantly less than the job gains from January. However, the report also noted the prior two jobs reports were revised down by a total 167,000 jobs, and the unemployment rate increased from 3.7% to 3.9%.

Earlier in the week, ADP’s employment report showed a slight uptick in private sector jobs, netting 140,000 positions last month. Both jobs reports point to likely rate cuts from the Fed in June, experts say, with the central bank keenly watching to ensure unemployment doesn’t cross the 4% threshold.

“Labor is rolling, and wage inflation is rolling over,” Cox said. “The Fed is threading the needle on its dual mandate. No one expected this result, but it’s happening.”

The monthly services index by the Institute for Supply Management also points to a slowing labor market, with the employment index declining to 48 from 50.5 in January and the “prices paid” component falling from 64 to 58.6.

Jeffrey Roach, chief economist for LPL Financial, noted that purchasing managers were generally upbeat last month and that inflation pressures seem to be under control. “This report indicates employers continue to grow payrolls but likely at a slower pace,” he said.

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