By Senad Karaahmetovic
S&P 500 Futures are trading modestly lower in pre-open Monday trading after Friday's jobs report that showed the U.S. added 236,000 jobs in March, somewhere in line with market expectations.
The unemployment rate is down to 3.5%, below the consensus of 3.6%. Average hourly earnings jumped 0.3% month-over-month and 4.2% year-over-year, marking the lowest level in 21 months.
The March jobs report is also the last labor market report before the Fed's next meeting in May. As of Friday, the market is pricing in a ~60% chance of a 25-bps rate increase.
For Bank of America's economists, the March jobs report showed that the labor market is "red-hot to hot." As a result, the economist sees the Fed hiking by 25 basis points at its May meeting as the jobs market remains "very tight."
"We still expect the Fed to go on hold after the May meeting, implying a terminal rate of 5.0-5.25%. The sequential slowdown in the data after January implies a weak handoff to 2Q, and creates significant risk of negative growth this quarter. The Fed will have a good amount of 2Q data by the time of its June meeting, which should justify a pause in rate increases," the economists said in a note to clients.
Morgan Stanley's economists also expect the Fed to hike by 25 bps at the May meeting.
"If the data aren't definitive then we think the FOMC is unlikely to quibble over 25bp, and instead maintain its conviction that holding rates high for an extended period is warranted to ensure inflation comes down clearly and convincingly," they wrote.
On the other hand, Citi economists see "a disconnect between markets presuming much easier Fed policy on "softer" data and how the Fed will actually see the data."
"Not only should high inflation and a still-strong labor market keep cuts unlikely, but we see persistently too-strong inflation, including a 0.5% MoM increase in core CPI, as leading to further hikes," they wrote in a note.
Along these lines, the Citi economists expect to see three additional rate hikes by 25 basis points, pushing the terminal rate to the 5.50-5.75% range.