US labor market shock: Twice expected jobs open door for Fed rate hikes

The United States labor market defied all predictions in May, demonstrating unexpected dynamism that could significantly alter the country's monetary policy. The Department of Labor reported the creation of 172,000 new non-farm jobs, a figure nearly double the 88,000 anticipated by analysts.

This robust performance is further bolstered by revised data from the preceding two months, which added an additional 93,000 jobs. The unemployment rate held steady at 4.3% for the third consecutive month, indicating that the U.S. economy is emerging from a prolonged period of weak hiring.

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The United States labor market defied all predictions in May, demonstrating unexpected dynamism that could significantly alter the country's monetary policy.

The significant divergence from market expectations now places pressure on the Federal Reserve (Fed). While attention had previously focused on inflation shocks caused by the energy crisis stemming from the war with Iran, the latest employment data not only diminishes the likelihood of interest rate cuts but also strengthens arguments among the Fed's more hawkish members for new increases. Investors and analysts are already anticipating a potential 25-basis-point rate hike before the end of the year, possibly in September.

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This robust performance is further bolstered by revised data from the preceding two months, which added an additional 93,000 jobs.

Job growth in May was broad-based across sectors. Leisure and hospitality led the gains with 70,000 new positions, a substantial increase compared to the previous year's monthly average of 14,000. Local government also saw growth, adding 55,000 jobs. The health and social care sectors continued to be steady sources of employment, contributing 35,000 and 12,000 jobs, respectively. These figures suggest the U.S. economy is resilient to geopolitical tensions in the Middle East, with the increased cost of oil and transportation through the Strait of Hormuz not negatively impacting business activity.

Despite the clear momentum shown in the report, some analysts note that the Fed's more dovish members still have arguments. The slowdown in the annual growth of average hourly wages to 3.4% and the fact that stable unemployment is partly due to new entrants in the labor market suggest the situation is not overheating. While firms like Capital Economics and Goldman Sachs believe the Fed will focus solely on inflation and the duration of the war in Iran for future decisions, Commerzbank analysts are more reassuring, predicting that the majority of the board will opt for caution.

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The significant divergence from market expectations now places pressure on the Federal Reserve (Fed).