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This morning’s employment report surprised to the upside with 517,000 jobs added to the US economy in January, crushing consensus expectations for 188,000 and pushing the unemployment rate down to 3.4%. Hiring was broad-based across industries with leisure and hospitality, professional and business services, and government hiring leading the gains. In addition, upward revisions for November and December totaled +71,000 jobs. The labor force participation rate ticked up slightly to 62.4%, although still running below the pre-pandemic level of 63.3%. Average hourly earnings declined to 4.4% year-over-year in January from 4.8% year-over-year in December, a sign that a key component of inflation is moderating.

Interest rates continue to trade in recently established ranges but did migrate higher over the course of the week, correlated with the generally constructive economic data and next week’s Federal Open Market Committee (FOMC) meeting on February 1st. The advance report on fourth quarter GDP was released on Thursday and moderately surprised to the upside, coming in at 2.9% compared to the consensus estimate of 2.7%, but notably below the widely followed Atlanta Fed GDP Now model which predicted growth of 3.5%. The underlying details of the GDP report were mixed, with household and government spending solid, somewhat offset by a higher-than-expected inventory build, which could be a drag on growth in the first half of 2023. This morning PCE inflation was released and more or less came in at expectations, with the PCE Deflator at 0.1% month-over-month and 5.0% year-over-year, a drop of 0.5% from the prior annualized number, and the PCE Core Deflator coming in at 0.3% month-over-month and 4.4% year-over-year, a drop of 0.3% annualized. Notably, in Chandler’s view, weekly jobless claims remain quite low, most recently at 186k per week, well beneath the 250k caution area. The totality of the recent data remains consistent with an outlook for positive, but below trend growth in the first half of 2023, with the trajectory of the economy not yet approaching stall speed.

Market volatility continued this week as investors digested softer economic data. The December Producer Price Index (PPI) confirmed a declining inflation trend, and weak retail sales provided evidence of slower consumer spending and economic growth. Producer prices fell 0.5% month-over-month in December and increased 6.2% year-over-year, decelerating from November’s 7.3% year-over-year increase. The Core Producer Price Index (PPI Ex-Food and Energy) rose just 0.1% for the month and 5.5% year-over-year in December, down from 6.2% year-over-year growth last month. Energy disinflation was the most significant factor in December’s lower numbers, while food prices came down marginally as well. Retail sales dropped 1.1% in December after a downward revision to a 1% decline in November. Retail sales rose 6% year-over-year in December, unchanged from November’s year-over-year gain. Weakness was widespread among core retail and food service sectors. Non-store retailers, motor vehicles, and gasoline all softened as well. Softer inflation and growth data should provide support for a downshift in the magnitude and pace of Fed rate hikes.