US President Joe Biden delivers remarks about the latest jobs report in the South Court Auditorium on 03 February 2023. AFP.
US President Joe Biden delivers remarks about the latest jobs report in the South Court Auditorium on 03 February 2023. AFP.
January’s US employment report was far stronger than expected, supporting our view the Federal Reserve is set to keep lifting interest rates and thus test financial markets’ strong start to the year.
Source: Bank of Singapore, Bloomberg.
Firstly, payrolls surged 517,000 versus forecasts of 188,00 gains and December’s increase of 260,000. In contrast, during the decade before the pandemic, the US labour market generated 179,000 new jobs on average each month.
Secondly, the unemployment rate fell to a new 53-year low of 3.4% while labour force participation rate ticked up to 62.4% as the first chart shows.
Lastly, the average work week rose significantly by 0.3 hours to 34.7 hours.
Source: Bank of Singapore, Bloomberg.
The US labour market thus remains very tight with average hourly earnings still growing 4.4%YoY. Firm wage growth will keep inflationary pressure strong and thus make the Fed’s job harder of returning inflation - currently at 6.5% for annual consumer prices rises - back to its 2% target.
Unsurprisingly, the S&P 500 fell 1%, 10Y Treasury yields jumped 13bps to 3.53% and the USD rallied after the data as the very strong employment report increases the risks of more interest rate rises this year. On Friday, the services ISM survey also rebounded into expansionary territory - rising six points to 55.2 as the second chart shows - underscoring the economy’s resilience despite the Fed’s year-long rate hikes to curb inflation.
We think investors should thus stay wary of the Fed and stress it is too early to forget about further interest rate hikes.
This month the central bank slowed its pace of tightening, lifting the fed funds rate by 25bps to 4.50-4.75%, as officials assess the impact of last year’s large 50bps and 75bps hikes on the economy. But we expect at least two more 25bps rate rises in March and May to bring the fed funds rate up to 5.00-5.25%. We also do not forecast any interest rate cuts later this year despite recession being likely in the second half of 2023 as officials focus on reining in inflation. Friday’s very strong payrolls report therefore raises the risk for further Fed hikes beyond May to the detriment of risk assets.
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