A Weaker Labor Market Strengthens the Fed’s Hand

• ADP data showed business added just 62,000 jobs in March.

• JOLTS numbers showed workers remain more available than jobs.

• These numbers highlight the labor market remains soft.

If you were hoping March would show the first signs of a hiring rebound, it didn’t…

With oil prices climbing on the back of the Iran conflict, Wall Street is suddenly juggling two big questions: Where’s economic growth headed, and will the Federal Reserve be forced back into rate‑hike mode? Institutional investors are concerned that rising energy costs could spark an inflation rebound. If that pressure sticks around long enough, it raises the risk that the Fed may have to tighten policy again — exactly what markets don’t want to see.

That’s why the next few weeks will revolve around the two pillars of the Fed’s dual mandate: maximum employment and stable prices. Those indicators will tell investors whether policymakers can stay patient or whether they’ll be pushed into action.

We got our first read on the employment side earlier this week. Payroll processor ADP reported that companies added just 62,000 workers in March. It was a modest decline compared to the increase of 66,000 in February. But the result was nowhere near the typical March gain of 132,000 since 2011…

March is typically a weak month for job seekers. But ADP’s update showed that the total hiring picture so far this year is far behind the normal pace. Companies have added roughly 140,000 workers compared to the typical 500,000. That means the hiring pace for rest of this year will have to be far above normal just to catch up.

But it wasn’t just ADP who showed a deterioration in hiring. According to the U.S. Bureau of Labor Statistics (“BLS”), the number of available jobs keep falling as well. In other words, a still weak labor market is likely to keep pressure on the Federal Reserve to lower interest rates, or at least leave them unchanged, or risk damaging economic growth. That should underpin a steady, long-term rally in the S&P 500 Index.

But don’t take my word for it, let’s look at what the data’s telling us…

The BLS data for February showed the number of available employment opportunities fell to 6.9 million from 7.2 million in January. That’s a drop of about 6.5 million from the March 2022 peak…

However, what’s even more important is when we compare that data to the number of unemployed people. By observing that ratio, we can get a sense of whether the job market is tightening or loosening. If it’s tightening, that means employees are harder to find, driving up wages. But if it’s loosening, more people are seeking work, keeping a lid on pay.

In February, there were almost 7.6 million individuals seeking work compared to nearly 7.4 million in January. That means there are roughly 0.9 jobs available for each individual seeking work. That’s the eight straight month below 1 and in-line with level from March of 2021…

Hiring momentum is also fading. The 3.1% pace of new hires is the weakest level since the pandemic…

While the quits rate remains low at just 1.9% of the workforce…

As I noted at the top, these signals matter because they shape how the Federal Reserve responds. The numbers are telling our central bank that the labor market continues to weaken. Policymakers have said they want to give recent rate cuts more time to work. Typically, that window is around six to eight months.

But our central bank can’t ignore that hiring remains. If it waits too long, it could be forced to take more drastic steps. So, being proactive now would be far better and require less easing.

We can tell how much room our central bank has to stimulate economic growth by looking at the real rate of interest (effective federal funds rate minus inflation). A positive number means policy is weighing on price growth, while a negative number means rates are stoking inflation. According to the most recent Consumer Price Index figures, the Fed has plenty of room to offer support…

In February, the effective federal funds rate was roughly 3.6% while inflation growth stood at 2.4%. When we subtract one from the other, we see the Fed has about 120 basis points of rate cut room before it hits the so-called neutral level, where rates are neither hurting nor helping economic growth. And if we consider our central bank has managed that real rate to an average of -0.6% since 2000, it implies it could lower rates as much as 180 basis points before stopping.

Bottom line: if Friday’s BLS report lines up with the trends we’re seeing, Wall Street will likely grow more confident in the Fed’s ability to ride out the Iran conflict without having to raise rates. And with plenty of cushion to ease once the situation is in our rearview mirror, the potential to reduce borrowing costs, free up cash, and support economic growth, should support a steady, long‑term rally in the S&P 500.

Five Stories Moving the Market:

U.S. President Donald Trump said the war in Iran is “very close” to completion, even as he signaled strikes could escalate in the near term; Trump said the operation had nearly achieved its military goals, including destroying Iranian ballistic missiles and drones, air force, navy and industrial base – Bloomberg. (Why you should care – Trump said negotiations are ongoing but warned they could intensify if Iran doesn’t strike a deal)

The U.S. Treasury Department said it will convene ‌meetings starting in April with domestic and international insurance regulators focused on recent developments ​in private credit markets; the Treasury Department said the meetings, scheduled to begin ‌in ⁠April and continue through early May, will allow participants to survey recent market events, emerging risks, risk management practices, ​and outlooks ​for the ⁠sector – Reuters. (Why you should care – the Treasury Department is likely seeking to increase transparency in the private credit markets)

Anthropic Chief Commercial Officer Paul Smith expects the company’s general-purpose artificial intelligence agent, Cowork, to reach a wider market than Claude Code, the hit product that helped turn the startup into an AI juggernaut; he said Anthropic has seen stronger adoption for Cowork “in the first few weeks” than it did in a comparable period for Claude Code a year ago – Bloomberg. (Why you should care – increasing usage should boost compute demand, driving the need for data center infrastructure equipment like semiconductors)

Federal Reserve Bank of Richmond President Tom Barkin said businesses continue to act as if high oil prices will prove only a short-term disruption, with little evidence yet it has caused consumers to pull back on spending ​or shifted public inflation expectations in a worrisome way – Reuters.(Why you should care – stable inflation expectations would imply policymakers are less worried about the need to raise interest rates)

The United Arab Emirates is preparing to help the U.S. and other allies open the Strait of Hormuz by force, Arab officials said, a move that would make it the first Persian Gulf country to become a combatant, after being hit by Iranian attacks – WSJ. (Why you should care – U.A.E officials believe the Iranian regime is fighting for its life and is requesting a global coalition to force the Strait open)

Economic Calendar:

Markets in Norway are closed, Sweden closes early

Australia – Exports, Imports for February (12 a.m.)

Switzerland – CPI for March (2:30 a.m.)

Eurozone – ECB Economic Bulletin (4 a.m.)

U.S. – Challenger Job Cuts for March (7:30 a.m.)

U.S. - Initial Jobless Claims (8:30 a.m.)

U.S. - Continuing Claims (8:30 a.m.)

U.S. – Exports, Imports for February (8:30 a.m.)

Canada – Exports, Imports for February (8:30 a.m.)

U.S. – 4‑Week Bill Auction (11:30 a.m.)

U.S. – 8‑Week Bill Auction (11:30 a.m.)

Fed's Balance Sheet Update (4:30 p.m.)