Payroll call

U.S. Payroll Data Overview (April 8, 2024)

• The April Non-Farm Payrolls (NFP) print exceeded consensus expectations, recording a net gain of 16,000 jobs for the prior two months combined, indicating the March figure was not an anomaly.
• This marks the first back-to-back monthly payroll gains in one year.
• Private sector payrolls have averaged 86,000 per month over the current four-month period, the fastest pace since December 2024.
• Job gains broadened beyond the previously dominant education and health sectors, with sharp increases also observed in trade and transport, leisure and hospitality, and construction.
• Unemployment rate (U3) remained stable at 4.3%, a key threshold for the Federal Reserve to maintain current rates while monitoring inflation.

Labor Market Nuances and Divergences

• Underemployment (U6 rate) ticked up to 8.2%, though this level has been fluctuating in the vicinity for several months.
• The divergence between the Establishment Survey (NFP) and the Household Survey widened; household employment fell for the fourth consecutive month while NFP showed gains.
• Strategists prioritize the Establishment Survey due to its lower standard error (120,000) compared to the Household Survey (500,000).
• Wage growth appeared muted, but overall income growth increased year-over-year as hours worked rose by 0.1 percentage points.
• The JOLTS report indicates a labor market vacancy-to-unemployed ratio of 0.9 for the last six months, implying fewer than one job opening per unemployed person.
• Duration of unemployment remains high, and while the market is solid, it is characterized as stable rather than "hot."

Federal Reserve Policy Forecast Revision

• Bank of America strategists have removed expectations for any rate cuts in 2024, shifting the forecast for the first two cuts to July and September 2025.
• The pivot follows a shift in Fed "doves" (Daly, Waller, Goolsbee, Moselem) adopting more hawkish rhetoric to preempt potential policy shifts under Chair Warsh.
• Core PCE inflation remains elevated at 3.2% (excluding tariffs), showing no meaningful progress toward the 2% target despite declining housing costs being offset by rising prices in other categories.
• At the April FOMC meeting, three hawks dissented from the standard balance of risks language, arguing risks of hikes and cuts were balanced, a view supported by Boston Fed President Collins.
• The consensus view is that policy is neither tight nor loose (neutral or slightly accommodative), removing the impetus for immediate cuts.

FX Strategy and Dollar Outlook

• The U.S. dollar remained relatively flat against G10 currencies despite the strong jobs report, suggesting the data was not sufficiently "hawkish" to break the current range.
• Market sentiment continues to overemphasize geopolitical de-escalation narratives (specifically regarding the Iran war) while underpricing growth differentials and the U.S. AI story.
• The inability of markets to price in future rate hikes under the projected Warsh regime is identified as a primary constraint on dollar strength.
• Elevated oil prices are expected to eventually be dollar-supportive, though this effect may be delayed until geopolitical clarity improves.

Global Rate Strategy Adjustments

• The firm has executed a 180-degree pivot on front-end rate positioning, moving from a "receive" stance in mid-2028 to "being paid" on front-end flatteners and a 5s3s steepener bias.
• The rationale for holding front-end yield curves is the perceived elevated risk of a shift in the Fed's outcome distribution toward holding rates steady or hiking, rather than cutting.
• The April payroll report validated the view that the labor market is resilient but not accelerating to a degree that forces immediate policy tightening, resulting in modest declines in rates following the print.

Forward-Looking Data and Risks

• Next week's CPI release is expected to show elevated headline numbers due to a one-time housing data adjustment (catch-up from October's zero print) and energy price volatility.
• Core services inflation is anticipated to remain elevated due to the housing component drag.
• Retail sales data is scheduled for Thursday, with forecasts pending in the Bank of America research report.
• Key risks to the new outlook include a potential re-acceleration of the labor market or further upside surprises in inflation data.