Inflation Cools, Labor Market Slows and Fed Rate Cut Expectations Shift

This week’s economic data includes: (1) job creation and employment situation for April, (2) weekly initial jobless and continuing claims and (3) market trends across equities, oil and Treasury markets along with rate-cut expectations.

KEY SUMMARY:

April’s jobs report showed a resilient but cooling labor market, with solid hiring led by health care and logistics beating expectations, steady unemployment despite a shrinking labor force, and growing signs of underemployment and slowing wage growth.  The stability in the labor market reinforces the Fed’s focus on inflation risks amid rising geopolitical pressures.

U.S. job growth showed renewed momentum in April, with employers adding 115,000 jobs—marking the second consecutive month of gains and the strongest two‑month stretch since 2024. Hiring was led by health care and logistics, helping payroll growth exceed market expectations significantly despite slowing from March’s pace. The unemployment rate held steady at 4.3%, largely because the labor force continued to shrink, reinforcing the perception of a resilient but constrained labor market. Against this backdrop, the Federal Reserve is likely to keep its attention squarely on inflation risks, particularly those tied to higher energy prices stemming from the war with Iran.

Beneath the headline numbers, job growth remained concentrated in service‑providing industries. Health care continued to dominate, reflecting sustained demand from an aging population, while transportation and warehousing posted a notable rebound despite remaining well below last year’s peak. Retail also contributed modestly, driven by big‑box and building‑related hiring. In contrast, manufacturing employment edged lower, while construction posted a second straight month of gains, supported by nonresidential projects such as data center development. Private‑sector employment remained the engine of hiring, while government employment continued to contract, led by further declines at the federal level.

At the same time, signs of labor market strain are becoming more visible. Labor force participation fell to its lowest level since 2021, and broader measures of labor underutilization worsened as part‑time work for economic reasons surged to the highest level in over a year. Long‑term unemployment remained elevated, permanent job losses increased, and wage growth continued to cool, rising modestly and below expectations. Although slightly longer workweeks helped support incomes, higher energy prices are likely to limit consumer spending, suggesting that while the labor market remains stable, it is increasingly characterized by slower growth, rising underemployment, and tightening labor supply.

Weekly jobless claims continue to underscore labor market resilience, with layoffs remaining contained and continuing claims falling to their lowest level since early 2024, signaling that displaced workers are still finding new jobs relatively quickly.

Weekly jobless claims continue to signal a remarkably stable labor market, with initial claims rising modestly but remaining well below expectations and year‑ago levels, suggesting layoffs are still contained overall despite high‑profile corporate announcements. At the same time, continuing claims fell to their lowest level since early 2024, reinforcing that workers who lose jobs are generally finding new employment quickly. Together, the data point to a labor market that remains resilient, with limited churn and little evidence of broader deterioration.

Markets capped off a powerful but conflicting week with tech-driven equity indexes hitting fresh record highs, oil prices retreating sharply as Middle East tensions eased, and Treasury yields ending little changed—cementing a backdrop of strong growth momentum alongside persistent geopolitical and inflation uncertainty.

Equity markets delivered a strong, tech-led performance, pushing the S&P 500 and Nasdaq to fresh record highs despite ongoing geopolitical tensions in the Middle East. The Nasdaq notched its sixth consecutive weekly gain—the longest streak since 2009—while the S&P 500 also advanced for a sixth straight week. Momentum was supported by a better-than-expected April jobs report showing steady unemployment, solid corporate earnings, and especially bullish guidance from semiconductor and AI-related companies. On the week, the Nasdaq surged 4.5% and is now up nearly 13% year-to-date, while gains were more modest for the Dow, reflecting continued market concentration in growth and technology names.

In contrast, the energy and rates markets reflected lingering macro uncertainty. Crude oil prices were highly volatile but finished the week sharply lower, with both Brent and West Texas Intermediate (WTI) down more than 6% as early war-driven spikes faded amid easing Middle East tensions and growing expectations for a diplomatic resolution. Forward futures curves suggest markets expect oil prices to continue declining through 2026 and return to prewar levels by late 2027. Gasoline prices, however, continued to rise—up over 50% nationally since late February—with California prices remaining significantly elevated. Meanwhile, Treasury yields ended the week little changed after swinging higher early on oil-driven inflation concerns before retreating as tensions eased. Rate expectations remain restrictive, with markets still pricing in no Federal Reserve rate cuts through 2027 and only a low probability of future hikes.

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DETAILED ANALYSIS:

Job Creation and Employment Situation – April Update:

Overview

According to the Bureau of Labor Statistics (BLS), businesses created 115,000 jobs in April, marking the second consecutive month of job gains and the strongest two‑month increase since 2024. Job growth was driven largely by the primary employment engine—health care—and the logistics sector. The unemployment rate held steady at 4.3% in April, mainly due to a decline in the labor force. While job growth slowed from the revised 185,000 increase in March, payroll gains significantly exceeded market expectations of 65,000 and signaled renewed stability in labor market conditions following a prolonged period of low growth since early last year. Given the resilience of the labor market, the Federal Reserve is likely to remain focused on inflation pressures associated with the war with Iran in the near term.

March payrolls were revised up by 7,000, while February payrolls were revised down by 23,000, resulting in a net downward revision of 16,000 jobs across the prior two months. The three‑month moving average of job gains eased to 48,000 in April from 63,000 in March and from an average of 72,000 during the same period last year.

Hiring was broadly distributed across several service‑providing industries, underscoring improving momentum following weather‑related disruptions earlier in the year. Manufacturing employment declined modestly, while construction added jobs for a second consecutive month, supported by continued strength in nonresidential activity.

Private and Government Employment

Private sector employment increased by 123,000 jobs in April, exceeding expectations and following a revised 190,000 gain in March. Job gains were concentrated in private service‑providing industries, while goods‑producing employment rose modestly by 10,000. Government employment declined by 8,000, marking the seventh consecutive monthly decrease. Federal employment fell by 9,000 and is now down approximately 348,000 jobs, or 11.5%, since peaking in October 2024.

Industry Breakdown

Health care continued to lead job creation, adding 37,000 jobs in April, in line with its twelve‑month average. Gains were concentrated in nursing and residential care facilities (+15,000) and home health care services (+11,000), reflecting persistent demand tied to demographics and an aging population. Social assistance employment rose by 17,000, driven by growth in individual and family services.

Transportation and warehousing added 30,000 jobs, led by a nearly 38,000 increase in couriers and messengers, the strongest gain since 2020. Despite the April increase, employment in the sector remains down more than 100,000 jobs from its February 2025 peak. Retail trade added 22,000 jobs, with hiring concentrated in warehouse clubs, supercenters, and building material and garden equipment dealers, partially offset by continued declines in department stores.

Within goods‑producing industries, construction employment rose by 9,000, supported by nonresidential projects, including data center development, while residential construction softened. Manufacturing employment declined by 2,000, with weakness concentrated in motor vehicle and nondurable goods production.

Over the past 12 months, health care and social assistance remain the primary drivers of employment growth, while most other sectors have experienced flat or negative net job creation. Information sector employment fell for the sixteenth consecutive month, reflecting continued workforce reductions in technology‑related industries.

Unemployment, Labor Force and Underemployment

The unemployment rate held steady at 4.3% in April, in line with expectations, largely due to a decline in labor force participation. The number of unemployed individuals increased by 134,000, or 1.85%, to 7.37 million in April from 7.24 million in March, and rose by 218,000 compared with a year ago. The labor force decreased by 92,000 to 170.0 million in April from 170.1 million in March and declined by 1.1 million year over year, driven primarily by stricter immigration policies and an aging population.

The labor force participation rate declined to 61.8%, the lowest level since October 2021, reflecting reduced participation among workers aged 55 and older. The employment‑population ratio edged down to 59.1%. The unemployment rate was unchanged after rounding; however, it increased slightly from 4.26% in March to 4.34% in April prior to rounding.

A key measure of underemployment—the number of people working part‑time for economic reasons—increased by the most in 14 months. As a result, the broader measure of unemployment (the U‑6 rate, closely watched by the Federal Reserve), which includes individuals working part time who would prefer full‑time employment and those who are discouraged and have stopped looking for work, rose to 8.2%, the highest level this year. This suggests workers are increasingly challenged by underemployment in the current low‑hire, low‑fire labor market.

Unemployment Duration, Layffs and Job Indicators

The number of individuals unemployed for less than five weeks rose by 358,000 to 2.5 million. Long‑term unemployment (27 weeks or more) remained little changed at 1.8 million, accounting for approximately 25% of total unemployment. The average duration of unemployment declined to 24.4 weeks from 25.3 weeks in March, indicating only modest improvement in job‑finding prospects.

Permanent job losers increased modestly by 108,000 to 3.51 million in April, while job leavers declined by 54,000, suggesting continued caution among workers. Temporary help services employment rose slightly by 7,900, reversing recent declines and pointing to tentative stabilization in forward‑looking labor demand indicators.

Wages and Hours

Average hourly earnings increased 0.2% month over month in April, matching March’s pace and coming in below expectations. On a year‑over‑year basis, wage growth slowed to 3.6%, below market expectations of 3.8%, continuing a gradual deceleration trend. Average weekly hours worked edged up to 34.3 from 34.2 in March, modestly supporting aggregate income growth, as reflected in a 0.5% increase in average weekly earnings. However, despite this income growth, higher energy prices tied to geopolitical developments are expected to limit consumer spending growth.

Weekly Jobless Claims – Week Ending May 2:

The Labor Department reported that initial jobless claims increased by 10,000 to 200,000 for the week ending May 2, rising from a revised 190,000 the prior week but still coming in below market expectations of 205,000. Initial claims have now remained meaningfully below year‑ago levels for the twelfth consecutive week. The four‑week moving average declined by 4,500 to 203,250, signaling that layoffs remain limited despite recent high‑profile layoff announcements from companies such as Block, Meta, and Nike.

Continuing claims, which track the number of individuals receiving unemployment benefits, declined by 10,000 to 1.766 million for the week ending April 25, down from a revised 1.776 million and below expectations of 1.8 million. This marked the lowest level since the week ending January 12, 2024. The insured unemployment rate remained unchanged at 1.2%, while the four‑week moving average for continuing claims fell by 5,250 to 1.790 million, reinforcing signals of a broadly stable labor market.

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WEEKLY MARKET ANALYSIS:

Equity Market

Equity markets posted a strong week, reaching fresh record highs for both the S&P 500 and Nasdaq despite elevated geopolitical tensions in the Middle East. The Nasdaq recorded its sixth consecutive weekly gain—the longest streak since 2009—while the S&P 500 also advanced for a sixth straight week. Gains were driven by a better-than-expected April jobs report, a steady unemployment rate, strong corporate earnings, and bullish guidance from semiconductor and AI-related companies, which particularly powered Nasdaq performance.

Weekly and Year-To-Date (YTD) Performance Highlights:

• Nasdaq: +4.51% (weekly) & +12.93% (YTD), closing at 26,247
• S&P 500: +2.33% (weekly) & +8.08% (YTD), ending at 7,399
• Dow Jones Industrial Average: +0.22% (weekly) & +3.22% (YTD), closing at 49,609
• Russell 2000: +1.72% (weekly) & +15.28% (YTD), ending at 2,861

Oil Market and Gasoline Price

For the week ending May 8, 2026, crude oil prices experienced another highly volatile period but ultimately finished lower, with both major benchmarks posting weekly declines of more than 6% despite a rebound in the final trading session. Prices initially surged early in the week following direct confrontations between the U.S. and Iran in the Strait of Hormuz and surrounding areas. However, prices fell sharply midweek as tensions eased amid the absence of additional military action and growing expectations of a diplomatic path toward a ceasefire. Overall, Brent crude declined $6.88, or 6.36%, for the week, falling from $108.17 to $101.29 per barrel, while West Texas Intermediate (WTI) declined $6.52, or 6.40%, from $101.94 to $95.42 per barrel.

Based on crude oil futures contracts settling in December 2026, Brent is currently priced at $87.28 per barrel, down $14.01, or 13.83%, from the May 8 settlement, while WTI is priced at $79.32 per barrel, down $16.05, or 16.82%. Futures contracts settling in December 2027 indicate further declines, with Brent priced at $75.46 per barrel and WTI at $72.40 per barrel. These forward curves suggest the market expects oil prices to continue declining as the Iran war is anticipated to end in the near future. While prices are not expected to return to prewar levels by the end of 2026, markets anticipate a return to prewar pricing by the end of 2027.

U.S. average gasoline prices tracked by AAA increased by $0.097 per gallon, or 2.19%, rising from $4.433 to $4.530 per gallon during the week. Since the onset of the Middle East conflict in late February 2026, gasoline prices have risen $1.546 per gallon, or 51.81%, from $2.984.

According to the Department of Energy’s weekly gasoline and diesel fuel update for the week ending May 4, the average price of regular gasoline in California increased by $0.174 per gallon, or 3.01%, from $5.785 to $5.959. California gasoline prices remain $1.484 per gallon, or 33.16%, above prewar levels, when prices averaged $4.475 per gallon at the start of the Iran conflict.

Treasury Market

Treasury yields were generally stable for the week, ending close to where they began. However, yields experienced notable volatility, rising early in the week as oil prices climbed amid escalating geopolitical tensions in the Middle East. Yields later retreated toward the end of the week as tensions eased and prospects for peace talks emerged, ultimately resulting in little net change despite stronger-than-expected payroll data.

Key Treasury Yield Movements:

• 2-year yield: 3.90% (+0.02%)
• 5-year yield: 4.02% (unchanged)
• 10-year yield: 4.38% (-0.01%)

Rate Cut Expectations

Similar to the prior week, investors continued to price in no Federal Reserve rate cuts for either 2026 or 2027. However, the probability of a rate hike in 2027 edged slightly higher, though it remains below 30%.

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NEXT WEEK’S ECONOMIC CALENDAR:

Key scheduled releases include:

• 5/11 (Monday)
  • Existing Home Sales for April
• 5/12 (Tuesday)
  • NFIB Small Business Optimism for April
  • CPI for April
• 5/13 (Wednesday)
  • PPI for April
• 5/14 (Thursday)
  • Retail Sales for April
  • Weekly Jobless Claims and Continuing Claims

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For a visual representation of this week’s economic review, you can view or download the slide deck here: 05.08.2026 CBC Weekly Economic Update Slides

Mark Yoon, CFA CPA

EVP & CFO of Commercial Bank of California

Thomas McCullough

EVP of Commercial Bank of California

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