US Job Market Booms in January, Fed May Have to Increase Hawkishness
By The US job market came in with a bang in January, with 517,000 jobs added, a nearly double the amount of jobs added in December.[0] This is well above what private forecasters were expecting, and the unemployment rate fell to 3.4%, the lowest it’s been since 1969.[1] Since the inauguration of President Joe Biden, more than 12 million jobs have been created.[2]
Yet, the employment report has raised some concerns that the Federal Reserve may have to do more to ease price pressures due to inflation not falling as much as predicted, and the unexpectedly strong jobs report. Given the current competitive job market, there is a chance that inflation could remain high, causing the Federal Reserve to become more hawkish in its approach to bring prices back to the target rate.
The January data has changed the market’s outlook on the Federal Reserve’s monetary policy. Markets are now aligning with the prediction of a terminal rate of 5.00-5.25% in May.[3] However, further upside surprises in data could push markets towards pricing rate hikes also for June and July.[3] Thus, consumer and market-based inflation expectations will be key to follow.[3] Although base effects may ensure that CPI figures come down this year, 1y1y inflation swap forwards have edged higher in the past few weeks.[3] This means that higher inflation expectations would warrant higher nominal rates for longer.[3] We still stick to our forecast of first cuts only in early 2024.
0. “Trade deficit widens, labor market still strong: PNC economists – Pittsburgh Business Times” Pittsburgh Business Times , 13 Feb. 2023, https://www.bizjournals.com/pittsburgh/news/2023/02/13/trade-deficit-widens.html
1. “How Did Economists Get the January Jobs Report So Wrong?” InvestorPlace, 13 Feb. 2023, https://investorplace.com/2023/02/how-did-economists-get-the-january-jobs-report-so-wrong/
2. “Op-ed: U.S. inflation and jobs reports show fastest recovery in 30 years under Biden” CNBC, 14 Feb. 2023, https://www.cnbc.com/2023/02/14/op-ed-us-inflation-and-jobs-reports-shows-fastest-recovery-in-30-years-under-biden.html
3. “US: From soft landing to no landing” FXStreet, 9 Feb. 2023, https://www.fxstreet.com/analysis/us-from-soft-landing-to-no-landing-202302091336
