Markets may be taking the wrong read from January’s shocking jobs report
January’s blockbuster jobs report does little to change the narrative for the economy or Federal Reserve monetary policy, according to views from multiple Wall Street economists. “January’s startlingly strong payroll growth is not sustainable, and correction in February is a good bet,” wrote Ian Shepherdson, chief economist for Pantheon Macroeconmics. “As strong as the January data were, one month never makes a trend,” opined Joseph LaVorgna, chief economist at SMBC Nikko Securities. “The resounding strength of January employment report does not change our view of the labor market. Significant imbalances remain in the labor market due to too much excess demand and limited labor market slack,” added Michael Gapen, chief U.S. economist at Bank of America. Despite the admonition from most experts not to read too much into the Labor Department’s nonfarm payrolls report, investors have taken the data as bad news and sold stocks over the past two sessions . That’s because they see the jobs report gain of 517,000 as a potential impetus to push the Fed into more aggressive interest rate hikes. Prior to the report’s release Friday, market pricing had indicated one more quarter-point hike in March, followed by a pause and then rate cuts by the end of the year. Watching the data But LaVorgna said markets are worried over nothing. He thinks future months will show a slowing labor market that will force the Fed into halting its hikes. “We do not expect the Fed to be more hawkish in response to the January employment data because a pivot back to larger than 25 basis point (bp) rate hikes would damage policymakers’ credibility,” he wrote. “Instead, the Fed will lift the level of the funds rate a bit more (another 25 bps) and then leave it there until inflation (or the economy) sufficiently slows.” Market pricing, however, has shifted regarding rate expectations. Traders now see a near-certainty of another quarter-point hike at the March meeting of the Federal Open Market Committee. They also are assigning about a 73% chance of another such move in May, according to CME Group data . Yet the expectations are still for a quarter-point cut before the end of the year, something virtually all Fed officials have said is unlikely. “The Fed made it clear [last week] that they are moving at a more data dependent mode, rather than the catch-up mode they were in before,” said Michelle Meyer, chief U.S. economist at the Mastercard Economics Institute. “From a data-dependency perspective, the strength of the labor market suggests there might be need to continue to raise interest rates.” Wage watch Payroll growth, though, does not tell the whole story of the labor market, and may not even be the critical data point for the Fed. Instead, central banks have been heavily focused on wage growth, which has showed signs of slowing. On a monthly basis, average hourly earnings rose 0.3% in January. Wages rose 4.4% from a year ago, a number that while just above market expectations marked a deceleration from December. Fed officials are likely to be watching that number closely. “As long as wage growth continues to track towards the 2-3 percent of pre-pandemic ‘normal,’ the Federal Reserve should be able to slow and then stop its current rate hiking cycle,” wrote Nicholas Colas, co-founder of DataTrek Research. Colas also notes that nonfarm payroll growth in 2022 was about 200,000 less than it was in the year before. That reflects a slowing, though still strong, jobs picture that will give Fed officials some confidence that their efforts are working. “There are occasional spikes and drop-offs in the data, but the overall trend is certainly to a slower hiring pace in the US economy,” he said. “Simply put, it is wrong to put too much emphasis on any one month such as January 2023’s 517,000 figure.” A January anomaly Seasonal factors also may have come into play for the report. January is traditionally the slowest month of the year for job gains. In fact, this was the largest increase for the first month of the year since 1946. Unseasonably warm weather may have played a hand and caused companies to hold off on layoffs, several economists said. “Job gains are likely to fall sharply over the next few months,” said David Kelly, chief global strategist at JPMorgan Asset Management, citing a decelerating economy that could mean “many employers may be reluctant to boost wages or hire unqualified workers just because they have unfilled positions.” The government’s nonfarm payrolls count was well ahead of the 106,000 growth reported earlier in the week by payrolls processing firm ADP . Shepherdson, the Pantheon economist, said that may be because ADP overweights California, which was hit by flooding during the month. He expects that data overall in January may overstate the strength of an economy expected to show considerably slower growth to start 2023.