By Benjamin Picton, Rabobank senior market strategist
Double or Nothing?
US non-farm payrolls put the final nail in the coffin of a March rate cut on Friday by printing at almost double the consensus estimate of economists surveyed by Bloomberg. Payrolls rose by 353,000 in January versus an expected gain of 185,000, and the December figure (already a beat) was revised higher by 117,000. Even the most bullish forecaster on the survey under-clubbed the number to the tune of 53,000 jobs (more than 1 standard deviation). Average hourly earnings also beat expectations to print at 0.6% m-o-m, which took the year-on-year figure back up to 4.5%.
The payrolls numbers seemingly confirm the signal provided by an unexpectedly strong JOLTS report earlier in the week. That report saw job openings exceed market predictions by some 275,000 positions. The ISM manufacturing survey also printed stronger than expected and is now on the verge of breaking out of contractionary territory for the first time since October of 2022. That’s interesting in the context of the Services reading (due out this week), which has been steadily heading in South since hitting historic highs in the reopening boom following the Delta outbreak of 2021.
Now for the cheerful pessimism: while the reaction to the jobs report was ebullient, the Bureau of Labor Statistics has had a habit throughout 2023 of downwardly revising the stated employment gains in subsequent releases. Indeed, eleven out of twelve months in 2023 have seen initially reported employment growth figures revised lower. This means that the total level of employment growth has been nothing like the number that would have been suggested by simply summing the month-to-month changes together.
Likewise, average weekly hours worked has been trending steadily lower since early 2021 with the decline accelerating sharply at the end of last year while the number of discouraged workers has risen by more than 30% over the last 12 months. The U6 measure of underemployment continues to trend higher as growth in full-time positions is outpaced by gains in part-time work. In fact, the Household Survey reveals that full-time employment actually fell by 63,000 in the month of January, marking the fourth-straight month of declines. So, the headline figures are nothing to sniff at, but your grandfather’s labour market it ain’t.
Perhaps this should be obvious and intuitive, because the conversation we are having is about when rates get cut and by how much. Powell himself is saying that the inflation data doesn’t need to get any better, it just needs to persist for longer. In an interview with 60 Minutes over the weekend Powell re-upped his signal from last Wednesday that a March cut is all but off the table, but in the eyes of the Fed Chairman it is now very clearly a matter of when, not if, rates come down. So, will it be May, or will it be June?
Telegraphed cuts aside, Powell is conscious that upside risks to inflation remain. A resilient labour market is one risk, but it’s not the only one. House Republicans and Democrats last week came together to YOLO $78 billion of tax cuts for businesses and families onto a budget deficit already running at 6.5% of GDP. Then there’s the issue of the Middle East.
With much of the progress on inflation coming courtesy of disinflation in internationally traded goods, there is a material risk that higher freight rates and interruptions to the flow of trade see some of the progress unwound. This is especially the case following retaliatory strikes in Syria and Iraq over the weekend that keep the risk of a broader regional war that could drag in the energy complex smouldering away.
This raises many questions about how policy should respond. How would the Fed view another supply-driven inflation shock in goods? Would they maintain their long-running policy of looking through that shock (“it’s transitory!”), or are Powell’s comments from November to be taken as a policy shift that implies structurally higher rates in a world of persistent shocks? Why doesn’t the Fed “look through” helpful supply shocks like factory gate deflation in China, Japan and Germany?
As always, there are just as many questions as answers, but we rest assured that the rate cuts are coming and it only remains to see when, and how many. Powell says three cuts, markets think (almost) double. Let’s hope that there are no supply-side curveballs that turn those three cuts into nothing.