Asset Allocation & Macro Research - Pictet Wealth Management

Faced with worker shortages, the US will also have a big hike to deal with.

The highlight of the US employment report for March was the sharp drop in the unemployment rate to only 3.6%, the lowest level since the pre-pandemic rate of 3.5% posted in February 2020.

In itself such rapidly declining unemployment rate shows the entrenched, robust momentum of the US economy, and a recession still appears at bay. A red flag would be a stagnating unemployment rate, but so far the unemployment rate seems to be barrelling down almost unstoppable.

Wage growth (average hourly earnings) remains firm at 5.6% y-o-y, although looking at the more granular level over the past two months, there seems to be some cooling-off potentially happening very recently.

The Federal Reserve could still continue to worry about the potential emergence of a wage-price spiral a la 1970s. We continue to think the next rate move is +50bp at the next scheduled meeting in May due to the ongoing concerns about inflation becoming more entrenched, after a first hike of +25bps in March. We also continue to think the Fed will announce the shrinkage of its balance sheet in May.

But since we do not expect such a wage-price spiral to materialise, we think the Fed could return to more serene pace of hikes after May (and, after summer, potentially pause rate hikes altogether). Long-term interest rates have already backed up a lot and could start to affect the economy, with a lag, post summer.