The Fed’s 25 bp interest rate increase and a surprising 517,000 new jobs in January, with the unemployment rate falling to 3.4% — a 53-year low — contributed to renewed confidence that the Fed can be bringing inflation down without putting millions of workers on the sidelines.
- The Fed’s rhetoric has changed, which supports investor confidence that the end of rate increases is nearing. Not convinced that inflation is on a sustained downward path, Chair Powell indicated a couple more rate hikes may be needed, but he also hinted that the end of increasing is in sight.
- There is still a disconnect between the Fed’s stated intentions on rates and where the market sees them going: Chair Powell said cuts later this year are unlikely, while financial markets were still pricing in around 40 bp in cuts even after last Friday’s report of over one-half million new jobs in January.
- The S&P 500 ticker was up 1.8% from the start of the Fed press conference last Wednesday at 2:30 until the market closed 90 minutes later.
While the January employment report showed 517,000 new non-farm payroll jobs in January and an upward revision of 813,000 to jobs growth in recent months, it also showed slowing wage growth, and a fall in the unemployment rate to 3.4%.
- Average hourly earnings rose by 0.3% m/m in January, and the annual growth rate fell to a 17-month low of 4.4%. Employment Cost Index reported last Tuesday was up 1% for Q-4 2022 – 4.2% annualized rate – which is also consisted with the January jobs report.
The debate on a 2023 U.S. recession is ongoing, with the no-recession believers buoyed by the January jobs report and a resurgence in productivity growth.
- Much like we experienced in the first half of 2022, we likely will see negative GDP growth in the first quarter of 2023 as a result of burning off the unexpected 2022-Q4 inventory build-up and the U.S. deteriorating trade deficit, but without a big increase in unemployment.
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