Private job creation slows as yield curve flattens

  • US ADP payroll is forecast at 438K in March, NFP at 475K.
  • The U.S. yield curve is flattening, sounding recession alarms amid bets on the Fed’s 50 basis point rate hike in May.
  • Fed Chairman Powell believes the labor market is strong enough and a recession is unlikely.

US private sector hiring is expected to slow in March after US companies added more jobs than expected in February. The US private ADP jobs report, due Wednesday at 12:15 GMT, generally provides a good clue to Friday’s full jobs report, so investors will be looking for clues about any potential slowdown in the labor market.

The pace of job creation is slowing in the United States

Automatic data processing (ADP) is expected to show US businesses added 438,000 new jobs in March, down from the 475,000 added the previous month. In February, corporate payrolls rose more than the expected figure of 375,000. ADP’s payroll data represents companies employing nearly 26 million workers in the United States and its monthly publication shows the development employment in the economy.

Source: FX Street

The US Department of Labor will release nonfarm payrolls on Friday, which is expected to show the economy likely added 475,000 new jobs in March after a surprise increase of 678,000 reported in February.

The ADP Automatic Data Processing jobs report is generally seen as a proxy for official nonfarm payrolls figures, which will be released on Friday, April 1.

The disparity between the two indicators over the past few months, however, makes the ADP result unreliable in assessing the trend of the NFP and, therefore, could have a limited impact on the market.

US yield curve flattens, Fed remains hawkish

Turning to monthly payrolls data, the Russian-Ukrainian conflict rages on as the likelihood of a 50 basis point (bp) Fed rate hike in May looks all but done.

Against this backdrop, US Treasury yields hit three-year highs, although the rise in longer-term yields did not keep pace with the rise in shorter-term ones. The spread between two- and 10-year yields narrowed to its lowest since early 2020 on Tuesday.

The flattening of the yield curve generally points to a likely recession, as investors continue to worry that aggressive Fed tightening will hurt the US economy longer term.

At the March FOMC meeting, Fed Chairman Jerome Powell said the labor market was strong enough that a recession was unlikely. Although Powell remains optimistic about the economy and the labor market, he said in his speech last week, “it’s an unbalanced labor market”, adding “we need the labor market to be sustainably tense”.

To conclude

Markets are pricing in a roughly 60% chance of a 50 basis point rate hike at the May Fed meeting.

A slowdown in the pace of hiring in the world’s largest economy could likely fuel the risks of a recession, especially in the face of soaring inflation. This could throw cold water on the Fed’s recent hawkishness.

ADP’s report, however, is unlikely to have a major impact on the US dollar and other related markets. Friday’s NFP release will hold the key to assessing the Fed’s policy action going forward.

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