The labor market surprised, but interest rates will continue to rise. Fed in dilemma

Yesterday there was no data on the US economy. The markets are still waiting for the big surprise in the form of a strong NFP report.

Employment in the US surprised

Recall that the US labor market feels much better than previously thought. Employment rose by 517,000 in January and earlier figures were also revised upwards. Despite the easing pressure on wages, from the Fed’s point of view, the labor market is likely to remain unbalanced. Thus, the rise in interest rates is likely to continue. The dollar is showing a three-day growth streak. As such, the US dollar index chart presents an interesting technical setup.

In January, the increase in jobs in the US amounted to 517,000. and was much higher than expected (185,000). Changes in previous months have boosted employment by another 813,000. At the same time, the unemployment rate unexpectedly fell from 3.5% to 3.5%. to 3.4 percent This is the lowest level since 1969.

The labor market is in a better position than expected

Rarely has one employment report changed the picture as much as the data from the previous weekend. The US labor market is in much better shape than previously reported. This is not only due to strong job creation in January, but also because past increases are much higher than previously reported after the annual review.

At the same time, some signs of weakness that were evident last month have disappeared. Then the employment of temporary workers, who are usually the first to be fired in a crisis, fell for five consecutive months. Now there are only two months of discounts left, and in January there was an increase of 26,000. In addition, the previously alarming decline in the average work week has been reversed.

The labor market has tightened even more, as evidenced by the unemployment rate. Only wage pressure points in the direction of easing. Average hourly earnings rose by just 0.3 percent. compared with the previous month, and the annual rate fell from 4.9 percent. to 4.4 percent, confirming the trend.

Until now, the Fed had hoped that the situation in the labor market would worsen, which would allow inflationary pressures to be brought under control. Until this happens. In recent months, the imbalance has increased even more. Jobs created far exceed the level of about 70,000 vacancies required each month to accommodate new people entering the labor market. There are currently two jobs for every unemployed person.

Friday’s data confirmed the Fed’s confidence that further increases should be continued. In response to the publication, the US currency strengthened significantly. On the dollar index chart, the bounce occurred in a very characteristic place. Falls, which lasted more than 4 months, ended around the mark of 100.7 points. The size of these discounts is noteworthy. They are very similar to the downward movement from the end of March 2020 to the turn of 2020 and 2021.

What about US interest rates?

The market assessment of the future path of US interest rates has also changed. Futures contracts point to the end of the cycle at around 5.1 percent. and assume a smaller decline in the value of money in the second half of 2023 and early 2024.

There are already hawkish comments from the Fed. Rafael Bostic of Atlanta acknowledged that the Federal Reserve may have to raise rates higher than previously expected. The US central bank will certainly have to take a closer look at Friday’s NFP data and determine if the employment data is some kind of anomaly. Powell will speak today (interview with David Rubenstein of the Washington Economic Club) and investors will be looking for any clues or comments on the strong report.