Source: Wall Street News
Author: Zhao Yuhe

On February 2, the US Bureau of Labor Statistics released data showing that the US non-farm payrolls increased by 353,000 in January, which was not only far higher than the general forecast of 185,000, but also higher than the expectations of all analysts. The number of employed people in December was raised to 333,000 from 21.6 previously. Under the suppression of high interest rates, the popularity of the US job market still far exceeds market expectations. The exaggerated non-agricultural data has once again cooled down the market's bets on the Fed's interest rate cut in March. The vast majority of analysts believe that interest rate cuts in March are impossible, and even discussions about interest rate policy changes will stop. However, some analysts say that the report still shows some signs of the labor market cooling down.

Gennadiy Goldberg, head of US interest rate strategy at TD Securities, said, “There are almost no exceptions to this report. We have seen strong overall job growth, strong revisions, and a constant unemployment rate. This shows that the labor market is performing better than expected.”

According to the Non-Farm Employment Report, employment growth this month was widely distributed, led by the professional and business services sector, which added 74,000 jobs. Other important contributors include healthcare (70,000), retail trade (45,000), government (36,000), social assistance (30,000), and manufacturing (23,000).

Daniel Zhao, chief economist at Glassdoor, said: “This once again confirms that the job market was on a solid foundation in early 2024. The widespread spread of employment growth across various industries is a healthy sign. Prior to today's report, we were worried that jobs were really concentrated in just three areas — healthcare, education, and government. While it is good to see these sectors driving employment growth, there is no guarantee that this will be enough to support a healthy labor market.”

Wall Street: It's impossible to cut interest rates in March, and it's unlikely that they may even stop discussing interest rate cuts in May

Financial blogger ZeroEdge said that it is generally difficult to have negative economic data in the US election year. The January non-agricultural data broke the logic and common sense of the late economic cycle.

The Federal Reserve remained on hold during last week's meeting. Powell said that if a series of low inflation readings continue to appear, most officials expect to cut interest rates this year. However, he hinted that it is unlikely that interest rate cuts will begin by the next meeting in March.

According to CME Group data, the futures market changed after the report was released, and traders now expect more than 80% chance that the Federal Reserve will not cut interest rates at its March meeting.

Kathy Jones, chief fixed income strategist at Charles Schwab, said: “This definitely justifies the Fed's decision to keep interest rates unchanged. The economy is strong enough to create a large number of jobs, and the 4.5% increase in hourly earnings suggests that for many Federal Reserve officials there may be a risk of demand-induced inflation.”

According to the report, hourly wage increased 0.6% month-on-month, the highest since March 2022, and the year-on-year growth rate last month was revised up to 4.3%, while this month's year-on-year growth rate reached 4.5%, reversing the downward trend. Zerohedge said that the Federal Reserve must take note of this. If the situation is true, not only will the interest rate cut in March not be considered at all, discussions on “whether to switch to interest rate cuts” will probably all need to be stopped.

Alex McGrath, chief investment officer of NorthEnd Private Wealth in South Carolina, said, “I think we can officially say goodbye to the interest rate cut in March, and it is very likely that we will not be able to cut interest rates in May.”

Brian Coulton, chief economist at Fitch Ratings, said, “Adding 350,000 jobs in a month is unlikely to mean that the labor market will cool down further, but rather that nominal wage growth will not fall back to a level consistent with continuing to meet inflation targets. This risk is increasing, particularly because the labor force participation rate refuses to rise further. In fact, the average hourly wage growth rate has been rising steadily since October, reaching an annual rate of 4.5% in January. The Federal Reserve Bank of Atlanta's wage tracker also remained high at 5.2%. In such a tight labor market, wages are growing at this rate, which is a problem for the Federal Reserve.”

Peter Tchir of Academy Securities said that although the Fed says decisions rely on data, what the market hears is “watching the data to know when to cut interest rates”. If any data shows signs of inflation, it may force Powell to withdraw discussions on interest rate cuts. Although it is still too early to consider withdrawing, as wage growth data is digested, more discussions will arise about whether a policy shift is appropriate. At the very least, it is expected that the extent of interest rate cuts will be reduced, the start of interest rate cuts will be delayed, and long-term bond yields will be pushed even higher.

George Mateyo, Chief Investment Officer at Key Private Bank, said: “There is no doubt that this is an explosive employment report and will prove that the Federal Reserve Bank's recent position is correct, actually ruling out the possibility of a March interest rate cut. Furthermore, strong employment growth combined with faster-than-expected wage growth may indicate a further delay in interest rate cuts in 2024, which should cause some market participants to reorient their thinking.”

Michelle Cluver, a portfolio strategist at Global X, said labor data “remains the focus of the market's assessment of when the Federal Reserve may begin to lower interest rates.” Beichen Lin of Russell Investments said that the January employment report emphasized that the path to restoring balance in the labor market will not necessarily be smooth and stable,” although he expects the overall trend of the labor market to cool down in 2024, he said, “An unexpected upward risk cannot be ruled out.”

Singing the opposite: there are still signs that the labor market is cooling

However, some analysts said that after in-depth analysis, there are still some signs of cooling the labor market. According to the report, not only did temporary job recruitment continue to be moderate, but the number of working hours per week fell to its lowest level since the 2020 pandemic.

ZipRecuiter's Julia Pollak said that in a good economic period, the work week was usually between 34.3 and 34.6 hours, but this figure dropped to 34.1 hours in January. She believes that cold temperatures may reduce the average number of working weeks, but this decline may also be a warning sign. “This number is usually a reliable measure of employers' demand for workers. When consumer demand weakens, companies usually reduce workers' working hours before cutting jobs. The number of working weeks reported in January sent a warning signal to the economy that layoffs could be imminent.”

Jeffery Roach, chief economist at LPL Financial, also pointed out that the number of workers has shrunk in three of the past four months. In his view, this indicates a “fundamental shift in the labor supply,” and this shift is putting pressure on wages and leading to a strong increase in average hourly wages. According to January employment data, the overall US labor force participation rate remained stable at 62.5% in January. However, among workers aged 25 to 54, the labor force participation rate rose slightly to 83.3% from 83.2% in December.

Jeff Schulze, head of economic and market strategy at ClearBridge Investments, said that perhaps the most “significant problem” in Friday's data came from the adjusted household survey data, not the employer survey employment figures that the media were concerned about. Household data tells a very different story, he wrote in a research report. Over the past year, the average employment growth in household surveys was 150,000 fewer jobs per month than in employer surveys. This difference is worth paying attention to, because historically, household data can more accurately reflect inflection points in employment growth, but the data is not impressive.”

In addition to Friday's data, it is worth noting that the number of people filing for the first time and continuing to claim unemployment benefits has risen in recent weeks. Citigroup economists suggest that this indicates that February's employment data will be weaker.

Editor/Jeffy