Despite the war in Europe and the global health emergency, U.S. Treasury yields and the dollar both gained ground following the release of the March nonfarm payrolls report by the Department of Labor. According to the data, the U.S. economy added 236,000 new jobs last month, roughly in line with expectations for 238,000 new positions. The unemployment rate, meanwhile, ticked lower to 3.5%. However, the rate of increase in average hourly earnings for private employees slowed to 4.2%. As a result, the yield on the 10-year Treasury note climbed to 3.372%, while the 2-year yield rose to 3.916%. The ICE U.S. Dollar Index, a measure of the greenback’s value against a basket of six major currencies, also edged higher.
The U.S. economy has now added jobs for 25 consecutive months, the longest streak on record. The job gains in March were broad-based, with increases in both the service and goods sectors. The former sector accounted for the lion’s share of the job growth, adding 169,000 new positions, while the latter added 67,000. The construction industry added 20,000 jobs, while the manufacturing sector added 19,000.
Job gains were further supported by a continued decline in the number of layoffs, which fell by 29,000 in March, according to the Labor Department’s Job Openings and Labor Turnover Survey. This reduced the number of layoffs as a share of total employment to 0.9%, the lowest level since the series began in 2000.
Despite the healthy job growth, wages remain a source of concern for the Federal Reserve, which is closely monitoring inflation dynamics. The slowdown in average hourly earnings growth in March suggests that wage growth remains subdued, an unexpected outcome given that the labor market is tight and the economy is operating near full employment. This could be due to factors such as increased productivity, a lower share of high-wage occupations, or the absence of strong wage-setting institutions like labor unions.
The Federal Reserve Bank of Kansas City President Esther George said in a recent speech that while she is concerned about higher inflation, the current environment of modest wage growth should allow the Fed to continue its current pace of rate hikes without having to rush. The Fed is widely expected to raise interest rates by a quarter percentage point in June, which would be its second rate hike this year.
Other central banks around the world have also started tightening monetary policy to address inflation concerns. The Bank of England, for instance, hiked interest rates for the first time in over a decade last November and is expected to do so again later this year. The European Central Bank has also signaled its intention to wind down its mass bond-buying program by the end of September, a move that could pave the way for rate hikes in 2019.
In general, tighter monetary policy tends to be positive for an economy’s currency, as higher interest rates make the currency more attractive to foreign investors. This is likely one reason why the dollar is gaining strength, along with stronger economic data and a relatively upbeat assessment of the U.S. economy by the Federal Reserve.
However, there are risks to this outlook. The continuing trade dispute between the U.S. and China could negatively impact global growth and, by extension, the value of the dollar. Additionally, geopolitical tensions in the Middle East could lead to higher oil prices, which could cause inflation to rise more quickly than expected, potentially prompting a more aggressive monetary policy response from the Fed. Finally, political uncertainty in the U.S., such as the ongoing investigation into Russian interference in the U.S. presidential election, could cause a loss of confidence among investors and weigh on the value of the dollar.
In conclusion, the U.S. economy remains strong, having added jobs for a record 25 consecutive months, and the unemployment rate is at its lowest level since 2000. However, lingering concerns about wage growth and inflation, as well as geopolitical risks and potential trade wars, point to an uncertain future for both the U.S. economy and the value of the dollar.