Stronger-than-expected US May jobs data closes the door on a July Federal Reserve rate cut, Mohamed El-Erian said.
“This is a really strong report in terms of demand for employees and in terms of wages paid,” El-Erian, the president of Queens’ College, Cambridge and a Bloomberg Opinion columnist, told Bloomberg Television on Friday.
The pace of job creation blasted past expectations in May, with nonfarm payrolls climbing 272,000 last month versus the 180,000 forecast by economists and a small downwardly revised gain of 165,000 for April. The unemployment rate edged up to 4%, while a snapshot of monthly wage growth picked up by a more-than-forecast 0.4% from 0.2% in April.
“It does close the door on a July rate cut, regardless of what the CPI number says next week,” said El-Erian. “There is no way they can cut or signal a cut in July with this data.”
US Treasury yields jumped around 13 basis points in the wake of the data, with the sharp selloff reflecting a substantial market rally since late May. After the jobs data Friday, the Treasury market sharply pulled back from pricing in two quarter-point cuts this year, between September and December.
Next week, the Fed will conclude its two-day policy meeting after the May consumer price index has been released. Together with the May employment report, the data will guide the central bank’s quarterly update of its economic and interest-rate projections for the rest of this year and into 2025.
Fed officials via their so-called dot plot signaled three cuts for this year back in March, and traders will focus on how far they dial back that forecast and to what degree they increase their long-run interest rate estimate from a current level of 2.6%.
El-Erian expects the policy-making Federal Open Market Committee will only signal one rate cut for this year and said Fed Chair Jerome Powell “will maintain maximum optionality” and “will retain his dependency mantra.”
The bond market has rallied substantially since late May as the broad tone of US data has indicated the economy is cooling, a trend that is expected to eventually smooth the way for Fed easing later this year. This week, the Bank of Canada and the European Central Bank eased policy by a quarter point, following a path recently begun by Sweden’s Riksbank and the Swiss National Bank.
El-Erian said the debate over rate cuts will keep running because “we are in a weakening economy,” and “there are no spare tires,” in the form of pandemic savings and fiscal spending. He said if the Fed “gets it wrong and you weaken too quickly, it’s a difficult mistake to correct.”
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