May 06, 2024 – The Federal Reserve's Open Market Committee (FOMC) met last week and decided to leave the fed funds rate unchanged, citing a strong economy and inflation that has failed to make any progress over the most recent couple of months. On the other hand, the most recent jobs data came in well below expectations at 175k, suggesting that the labor market cooling trend may have already started. With a weaker-than-expected jobs report and the Fed hinting that a rate hike is unlikely, mortgage rates ended last week at the lowest levels since early April, and provided hopes that rates may start to creep down as we approach the second half of the year.

Federal Reserve leaves rate unchanged as inflation progress stalls: The Federal Reserve kept the fed funds target range steady at 5.25% to 5.50% after its March FOMC meeting, due to lack of progress in inflation easing in recent months. The central bank also suggested, however, that it will likely hold rates at their current level longer rather than raise rates again. Fed chair Jerome Powell acknowledged that the inflation fight has experienced setback in the past few months but expected inflation to resume its declining trend later this year. At the conclusion of the meeting, the Committee also announced that it intends to slow the pace of quantitative tightening, the ongoing reduction of its $7.4 trillion asset portfolio, starting on June 1. By significantly curtailing the selling off of its assets, the Fed is hoping to keep normalizing the size of its balance sheet without creating money market stresses and putting too much upward pressure on interest rates.

Latest jobs report shows hiring slowdown: The employment situation in April came in softer than expected and started the second quarter with signs that the labor market could finally be cooling. Nonfarm payrolls added a seasonally adjusted 175k jobs in April, the slowest growth pace in six months, and was well below the consensus expectations of 240k gain. While last month’s jobs numbers were sharply below the upwardly revised 315k increase in March, they were in line with pre-pandemic levels and on par with the neutral rate of job growth to keep up with population growth. Meanwhile, the unemployment rate inched up to 3.9% last month from 3.8% in March and remained below 4% for the 27^th consecutive month. Wage growth recorded its first sub-4% print in nearly three years with average hourly earnings rising 3.9% year-over-year, another signal that suggests a slowdown in the job market is forthcoming.    

Consumer confidence deteriorates for the third straight month: Consumers’ attitude towards the economy dipped again in April, with the Conference Board’s Consumer Confidence Index declining to 97.0 from a downwardly revised 103.1 in March. Elevated price levels and political/geopolitical conflicts remained the utmost concerns for consumers, as their confidence level dropped to the lowest level since July 2022. The Present Situation Index, which measures consumers’ current assessment of business and labor market conditions, fell 3.9 points to 142.9, while the Expectation Index slipped 7.6 points from the prior month to 66.4. Less optimism in the labor market was likely another driving force for the decline in consumer confidence last month, as 14.9% of consumers viewed jobs as “hard to get,” an increase from 12.2% in March. Consumers were also more downbeat about their short-term job outlook, as 11.7% expected more jobs to be available, a decline from 14.3% in the prior month. The rising trend in interest rates before the latest FOMC meeting might also have been a contributing factor to the decline in optimism in recent months. 

Productivity slows but remains solid in Q1: U.S. worker productivity growth stalled in Q1 2024 as hirings surged and hours worked picked up. The index, which measures hourly output per worker, inched up at an annualized pace of 0.3% from the prior quarter after jumping 3.5% in Q4 2023. When compared to a year ago, productivity remained solid though with an increase of 2.9%, the strongest gain in three years. As a result of slower growth in Q1, unit labor costs (ULCs) jumped 4.7% from the prior quarter at an annualized rate. The increase on ULCs, however, was much more modest when compared to a year ago, with an increase of just 1.8% year-over-year. With the annual ULCs showing continuous signs of easing, inflation could resume its downward path in the short term if productivity growth remains positive.

Residential construction spending slows across the board in March: Construction spending in the U.S. fell for the second time in three months, with total outlays declining on a month-to-month basis by 0.2% in March. While the overall spending continued to increase on a year-over-year basis by 9.6%, the monthly dip was a surprise as economists polled by Reuters projected a 0.3% gain for the month. A pullback in residential spending and a further slowdown in private nonresidential spending were the primary factors that weigh on the headline number. With the resurgence in mortgage rates in March, residential spending fell across the board with single-family, multifamily, and home improvement all declined month-over-month in March. Despite weaker total outlays in March, acute housing shortage and recent decline in mortgage rates should continue to provide support to home building activity, and spending on single-family constructions is expected to improve gradually in the second half of 2024.

Note: The weekly market minute report is updated every Monday by 6:00 PM PST.