Any way you cut it, the labor market remains healthy. The U.S. added 303,000 jobs in March for the fifth month of consecutive gains, matching the largest increase in 10 months. People continue to enter the labor force, which is what the government has been waiting for. The labor force participation rate increased to the highest level since November. Job growth was the strongest in three key areas: health care, leisure & hospitality, and government; accounting for 60% of total job gains. The increase in jobs is being accomplished seemingly without impacting inflation. Average hourly earnings rose 4.1% year-over-year, the smallest increase in almost three years. All in all, the picture from March suggests the Fed may have accomplished one of its two mandates (a stable labor market) and can now focus 100% on inflation.

ISM – The Institute for Supply Management’s (ISM) gauge for manufacturing lit a fire in the financial markets this week, but not the way investors like. The index rose 2.5 points in March to 50.3, the first time above 50 since September 2022. A reading of 50 or higher suggests expansion. While the level is barely above the critical mark, it is enough to signal a possible turnaround from 16 months of declining manufacturing activity. The increase was prompted by a sharp rebound in production and demand. New orders rose above 50 for the second month this year after being in contraction mode since September 2022. Nine out of 15 industries reported growth. The move into expansion territory is certainly a good sign of economic strength except one – prices paid. In this case, the March reading of 55.8 was the highest since July 2022 and sent inflation warning signals. Signs of rebounding manufacturing activity along with the higher inflation reading gave the markets a pause in the hopes for rate cuts. Expectations for a June cut moved lower to 50% with the greater chance of a cut being deferred to September.

More Fed – A week of job-related data, unexpected results in the ISM index and rising oil prices opened the door for more Fed talk. The one common theme from the officials was the Fed has time to be patient before cutting interest rates. Most officials are trying to write off the January/February spike in inflation as not worrisome but are still keeping an eye on the pace of prices. Atlanta Fed President Raphael Bostic very pointedly expressed his opinion for just one rate cut this year, possibly as late as the fourth quarter. Bostic believes inflation will continue to fall incrementally over the next two years but not hit the 2% target until 2026.

Minneapolis Fed President Neel Kashkari went as far to say that he is questioning if any rate cuts are necessary. This comes after Kashkari initially jotted down two rate cuts this year. Richmond Fed President Thomas Barkin believes it is smart for the Fed to take its time to gain more clarity on the path of inflation. The most dovish of comments came from Chicago Fed President Austan Goolsbee who believes current policy may be too restrictive and threatens to hurt the labor market. Fed Chair Jerome Powell summed up the opinions that the higher inflation data earlier this year does not “materially change the picture” and that it will likely be appropriate to begin lowering rates “at some point this year.” Powell’s words softened some of the later-than-sooner talk, but the markets latched on to the fact that rate cuts may be few and far between this year.