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The US economy added a monstrous 353k jobs in January, beating consensus expectations of just 185k by a considerable margin to record the largest net employment increase since last January’s 482k print.
While the fact that both bumper readings have occurred at the start of the year suggests that an outsized seasonal factor is at play, it is notable that the details of today’s report were also firm, meaning the data cannot be chalked down to a January effect that isn’t captured by seasonal adjusters. Of the details, even monthly revisions in the establishment survey, which have been negative for much of the past year, came in positive, with December’s payrolls reading revised up +117k to 333k and November’s up by +9k to 182k. All told, the strength in the latest labour market report underscores the Fed’s hesitancy in declaring victory in taming inflation, even as some economists point towards core inflation tracking below 2% on a 6-month annualised basis to suggest economic conditions are already conducive for cuts.
The data is also confirmation of our view that the Fed is unlikely to move on policy before May’s meeting, a stance that publicised by Chair Powell at Wednesday’s meeting. In fact, even our view of a more delayed start date for Fed easing is at risk should today’s jobs data be compounded by an uptick in January inflation in a fortnight’s time.
Nevertheless, the signs of more persistent inflation pressures and stronger underlying growth from the labour market validates our view that the US economy is growing at a rate above-consensus. Should this lead markets to dash hopes of Fed easing in Q1 entirely, this should see the dollar take another leg higher in the coming weeks, especially if it coincides with weak growth data out of other major economies.
As mentioned, the details of today’s jobs report were also firm outside of the headline 353k employment gain. Job gains were broadly distributed across all industries, with losses recorded solely in industries involved in commodity extraction where external growth conditions tend to dictate activity and employment levels.
Meanwhile, industries more exposed to domestic demand, and specifically consumer demand, recorded some of the strongest job gains with progressional and business services employment rising by 74k, health care by 70k, and retail trade by 45k. Additionally, the unemployment rate remained at 3.7%, against expectations for an uptick for the second consecutive month. Contrary to the Q4 unit labour costs data yesterday, which showed productivity rising and employee compensation falling considerably as a result, average hourly earnings shot up 0.6% MoM as workers also recorded fewer hours on average. This not only led to an uptick in the annual rate of wage growth from 4.3% to 4.5%, but also suggests that wage increases are more inflationary than eluded to by measures such as ULC.
It is unsurprising that as a result of today’s strong jobs report, front-end Treasury yields are back at the top of their year-to-date range as nearly a full rate cut is priced out this year in swaps. An uptick in yields and signs that the US economy continues to expand at a robust pace despite weak external growth conditions has provided a strong basis for the dollar to retrace the majority of this week’s losses.
This backdrop should remain supportive of USD appreciation throughout next week too, as strong wage growth provides an upside risk to January’s core CPI reading on the 13th.
The dollar surges as jobs data leads markets to price out nearly a full rate cut this year
Author:
Simon Harvey, Head of FX Analysis