Financial markets have spent much of the week digesting the extremely strong US payrolls report that was released last Friday
Highlighting that the US economy, despite some warning signs, is starting 2023 in reasonable health. The question, of course, is what this means for interest rates and while inflation may be easing, a labour market on the brink of overheating suggests the Federal Reserve will have to keep their foot on the monetary brakes for longer than markets are pricing.
Markets have already moved to reprice expectations for US rates, with the peak now expected at just over 5% in June and rates by year end 20 basis points higher than anticipated before the jobs data was released. That said, markets are still anticipating rate cuts before the end of the year, which remains out of sync with what Federal Reserve members continue to say. In terms of the jobs data, the US added 517,000 jobs in January, well above the 185,000 expected. The unemployment rate fell back to 3.4%, a 53-year low. Fed Chair Jay Powell said the data “shows you why we think this will be a process that takes a significant amount of time… the labour market is extraordinarily strong”. Powell noted that the Fed “may have to raise rates more than is priced if we continue to get strong labour market reports or higher inflation”. His colleague Raphael Bostic saw the jobs report as increasing the possibility the Fed would have to raise rates more than previously forecast. Bostic also warned that there was “still a lot of work to do” to reduce inflation in the services sector. Neel Kashkari of the Minneapolis Fed said, “there’s not much evidence, in my judgement, that the rate hikes we’ve done so far are having much effect on the labour market… we need to do more”.
Elsewhere in the economic data the PMI services data for January was generally better than expected, with a notable bounce in the December data in the US while the eurozone, and the UK, both saw data ‘less bad’ than expected, and in the case of the eurozone, back into ‘expansion’ territory. The UK saw GDP data published for the fourth quarter of 2022, and just avoided a technical recession with flatline of 0.0%, following a decline of 0.2% in Q3. The UK economy remains 0.8% smaller than in Q4 2019, before the Covid 19 pandemic. This contrasts with the US, whose economy has grown by 5.1% over the same period, and the eurozone, with growth of 2.4%.
In politics, US President Biden gave his ‘state of the union’ address to Congress and promised the US would not breach the debt ceiling and move into default. He called for Congress to increase taxes on share buybacks and billionaires, though with Congress now divided with Republicans controlling the House, it seems unlikely the President will be able to get through any major legislation in in the time remaining before the next election. Despite his advanced years and low approval ratings, the President is expected to announce in the near future that he will seek re-election in 2024. One thing that didn’t happen this week was US Secretary of State Antony Blinken’s visit to China, in what would have been the first such visit in 4 years. The trip was cancelled in the aftermath of the Chinese weather/surveillance (depending on who you believe) balloon flying over US airspace, until it was eventually shot down.
