Markets were confused and misled, the Fed was not: Jonathan Levin

In April, macro data suggested a positive shift in the economy, easing concerns over inflation and labour markets. Nonfarm payrolls report indicates slowing wage growth and moderate job gains. Services sector earnings growth cools, boosting confidence in taming inflation. Despite recent market volatility, Fed Chair Powell remains unfazed, awaiting more evidence before rate adjustments. While challenges persist, the economy shows signs of stabilisation, offering optimism for the future..Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox at 5:30am weekdays. Register here..By Jonathan Levin.Data watchers can finally turn the page on a troubling but misleading first-quarter of inflation and labor-market data. The nonfarm payrolls report on Friday marked the first major macro data dump for the month of April, and it suggested that the economy is still on its trajectory of rebalancing labor markets, moderating wage growth and cooling inflation. Now, let's just hope this continues. .___STEADY_PAYWALL___.The Bureau of Labor Statistics reported that employers added 175,000 jobs last month, the smallest increase in six months, and the unemployment rate ticked up to 3.9%. Even more significantly, the three-month annualized pace of average hourly earnings growth slowed to 2.8%, slightly below the 2017-2019 "normal" pace of about 3%. In a market obsessed with inflation and monetary policy above all, that's helped power a rally in 10-year Treasury notes and send the S&P 500 Index up more than 1% at the time of writing..Under the surface, the details were even more encouraging. Average hourly earnings for services — a group of sectors that Fed Chair Jerome Powell has highlighted as a key to taming inflation — slowed to a 2.6% annualized pace over the past three months, the coolest since March 2021. And that came even after a new $20 minimum wage for fast-food workers that took effect in California on April 1, which only pushed average leisure and hospitality earnings up about 0.1% from the previous month. (After the large leisure and hospitality moves in February and March, the three-month annualized increase still stood at a highish 4.7%, perhaps because the minimum wage adjustments were anticipated in advance.).It's important, of course, to take the numbers with a grain of salt, just as it was when noisy statistics last quarter seemed to suggest the opposite story — that wage increases and inflation were reaccelerating. But so far in April, the data at our disposal is generally pointing toward an economy that the Fed will find much more palatable..The Conference Board's gauge of US consumer confidence weakened in April to the lowest since mid-2022. The Institute for Supply Management's composite gauge of services fell to 49.4, the lowest level since December 2022. And an index of mortgage applications for home purchases fell in each of the last two weeks of the month, according to Mortgage Bankers Association data..In other words, the first quarter may have been, in fact, a headfake. Employers may have front-loaded "catch-up" raises in January; payrolls may have swelled in part due to immigration (which actually helps with disinflation); and the consumer price data may have been affected by unpredictable lags in categories such as shelter and insurance. .For all the volatility we've seen in markets, Fed Chair Powell doesn't seem to have been nearly as shaken by the wild first three months of the year, essentially dismissing any suggestion of rate hikes and reiterating on Wednesday that policymakers were simply waiting on more evidence of disinflation to cut..Of course, none of the data so far is anywhere close to the what the Fed must see before lowering rates, with the consumer price index and personal consumption expenditures deflator getting far more weight than anything else. After three months of not-great inflation data, I suspect that policymakers will need to see at least three better ones before they cut rates — and that means, barring a shock-induced recession, that a July cut is the absolute most optimistic scenario for doves. But at least the ugly and noisy streak of first-quarter data is now behind us, and that's a step in the right direction..Read also:. Powell's soothing reassurances are not enough to calm inflation-spooked US markets Central banks to pursue cautious rate cuts as inflation concerns lingerInvestors adapt to lingering inflation: Wealth managers see opportunities amid uncertainty.© 2024 Bloomberg L.P.

Markets were confused and misled, the Fed was not: Jonathan Levin

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