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Payrolls Crush Expectations, Slashing Odds on March Rate Cut

The US economy generated far stronger wage growth and more jobs than expected in January, driving yields and the dollar higher, while almost certainly taking a March rate cut off the table. According to data released by the Bureau of Labor Statistics this morning, 353,000 jobs were added, and the unemployment rate held steady at 3.7 percent, remaining near historic lows. Average hourly earnings rose 0.6 percent month-over-month, up 4.5 percent year-over-year, solidly topping expectations for a 4.1 percent increase. Ahead of the release, consensus estimates had pointed to a 185,000-job gain, and the unemployment rate was seen moving up to 3.8 percent.

Diffusion indices remained broadly positive. According to the Bureau, “Job gains occurred in professional and business services, health care, retail trade, and social assistance, Employment declined in the mining, quarrying, and oil and gas extraction industry”.

Revisions added roughly 27,000 positions a month through the back half of 2023, with updated estimates showing an average of 255,000 jobs added throughout the year. December’s headline number was revised up to 353,000 from 333,000 previously.

Monthly change in non-farm payrolls, thousands

The dollar is surging higher, equity futures are holding steady, and yields are correcting upward as traders move to price in a less aggressive monetary accommodation process in the coming months. Rate cut expectations for the Fed’s March meeting are falling below 20 percent, and the two-year Treasury is yielding 15 basis points more as we go to print, with the ten-year back near the 4-percent threshold.

Rate cut expectations for the latter half of 2024 should also be pulled back: Federal Reserve officials are unlikely to follow policy orthodoxy in cutting rates toward neutral real territory as long as the second half of the central bank’s mandate continues to blow the doors off. Correspondingly, risk-on dynamics seem poised to rule currency markets for now.

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