Wage and job growth in the US will keep the Fed rate from cutting

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January labor market data turned out to be almost twice as high as the consensus forecast. A Fed rate cut in March now looks unlikely, but markets continue to rise.

What's happened

The US Department of Labor published an employment report for January:

• 353,000 jobs were created in a month, exceeding economists' estimates. Most of the growth was driven by healthcare, retail and services, but overall new job openings appeared in all sectors of the economy except mining and gas. Growth exceeded the consensus forecast by almost twice.
• The unemployment rate remained unchanged at 3.7%.
• Salaries have risen sharply. The average hourly wage increased by 0.6%, an increase in annual terms of 4.5%. This is partly due to reduced working hours.

What's next

The boom in the labor market shows continued inflationary pressure on the economy, which will likely keep the Fed from cutting interest rates in the near future, Bloomberg writes. At the same time, strong demand and strong labor productivity may encourage businesses to hire and retain more workers, a trend that could further protect the U.S. economy from a recession this year.

Fed Chairman Jerome Powell at its meeting in late January pushed back the expected timing of rate cuts, saying that the start of the monetary policy easing cycle in March was unlikely and was “certainly not a baseline scenario.” Powell noted progress in reducing inflation, but said the regulator is waiting for signs of a steady decline towards the target 2%.

Powell also tried to cool markets that were expecting 5 or 6 rate cuts in 2024, noting that rates “will remain high longer if necessary.”

The likelihood of a rate cut in March, according to futures markets, after Powell's speech dropped to 36%, although a week ago it was 48%. Economists at Goldman Sachs pushed back their expectations for the start of rate cuts from March to May, maintaining their forecast of five cuts in 2024 and three more in 2025.

After the publication of labor market data, traders also reduced their bets on the May key rate cut - from 94% the day before to 71%. The estimate for the likelihood of a rate cut in March fell to 21.5%.

US Treasury bond prices fell and the dollar strengthened against all major currencies. But this did not prevent the S&P 500 and Nasdaq 100 indices from growing again—bigtech distracted investors from labor market data. The S&P 500 set another record on Friday, helped by strong quarterly reports from Meta and Amazon, whose shares rose 20% and 8%, respectively.

The consumer sentiment index rose in January compared with the previous month, which was the highest level since 2005.