Asian equity markets exhibited mixed results this morning, with modest changes on the day. Positive earnings reports, including encouraging Apple news, seem to have helped lift sentiment. However, declining European and US markets yesterday, following reports of issues at two additional US regional banks, indicate that uncertainty persists. In China, the April Caixin services PMI was solid, while German factory orders dropped by 10.7% in March. Early results from yesterday’s English local elections suggest some Labour gains, though the full outcome will not be known until later.

Monitoring the US Labour Market Report

The US labour market report is consistently viewed as a key indicator of US economic conditions. Lately, it has gained even more significance as the Federal Reserve cites potential domestic inflationary pressures as a major reason for its continued increase in US interest rates. This week, the Fed strongly hinted that after ten consecutive moves, it intends to pause its rate hiking from the next policy update in June. However, it left itself some wiggle room, and today’s report for April is the first of two labour market updates before the June announcement, which will be crucial in determining whether the pause proceeds.

Throughout this year, US employment growth has been robust, and the unemployment rate has continued to hover around cycle lows. However, considering reports of job layoffs, particularly in the financial and tech sectors, conditions are anticipated to cool. We expect today’s report to reveal slower but arguably still stronger than sustainable employment growth in April of 170k and an unchanged 3.5% unemployment rate. Furthermore, while there have been indications this year that wage growth has been slowing, for April, we anticipate a similar rate to March. Overall, this report is not expected to provide overwhelming support for a pause. However, it should be more than sufficient, given that the Fed probably intends to stand pat unless the counter-evidence is extremely compelling.

Bank of Canada and UK Construction PMI

The Bank of Canada, which has already paused interest rate hikes, faced criticism for possibly having been premature following last month’s stronger than expected labour market report. Consequently, a similar outcome today for April may increase the pressure on them to reconsider their position.

In the UK, the April construction PMI may offer some helpful insights into a very interest-sensitive sector ahead of next week’s Bank of England policy update. The headline index retreated in March from February’s nine-month high but importantly remained above the 50 expansion/contraction level. The details continued to show declines in housing construction offset by increases in commercial activity and civil engineering.

Markets and Interest Rates

US Treasury yields rose modestly yesterday, while UK gilt yields experienced a slight decline. In currency markets, sterling is up against both the euro and the dollar. After a European Central Bank monetary update that was largely in line with expectations, the outcome of next week’s BoE interest rate call is now awaited. Meanwhile, markets continue to assess the odds on what will happen next to US interest rates.