Friday’s payrolls report was seen by some as confirmation that the labour market is slowing. Payrolls increased 175k in April, missing expectations, and the 3-month annualised rate for average hourly earnings eased to 2.81%. The jury is still out on wages, however. The employment cost index (ECI) is more comprehensive: wages & salaries for all civilian workers climbed by an annualised 4.52% q/q in Q1, the firmest increase in a year, pushing the y/y up to 4.39%.
Payrolls still rose by an average of 242k per month in the three months to April. And despite edging up from 3.83% to 3.86% in April, this is the longest stretch of sub-4% unemployment (27 consecutive months) since the late-1960s. The rise in Treasury yields has paused, but the outlook has not changed. With core inflation still running above the Fed’s target, longer-dated Treasury yields will recommence their upward march towards 5%.
Indeed, house prices are rising north of 6% y/y in the US, casting further doubt on the idea that shelter inflation will tumble. Historically, house price growth is strongly correlated with rent inflation 18 months later. The Freddie Mac house price index for March rose 0.39% m/m to a record high in nominal terms, and was up 6.59% y/y. In February, the FHFA house price index jumped 1.25% m/m: the y/y accelerated to 7.04%, the fastest annual rate of house price growth since November 2022.
A rapid deceleration in shelter inflation is by no means guaranteed. According to the 2024 NY Fed SCE Housing Survey (fielded in February), households expect rents to increase by 9.7% over the coming year, up from 8.2% in February 2023. Renewal rents for single-family homes are proving stubborn, as per Q1 earnings releases.
