2/03 - Weekly Economic Highlights

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.

Another important data point from today was the Institute for Supply Management (ISM) Services index, which rebounded to 55.2 in January after plummeting below 50 to 49.2 in December. The lower reading for December was likely the result of travel and power disruptions caused by severe winter storms during the month. Overall, the January reading indicates that the service sector remains robust and close to its long-run average despite higher interest rates.

These strong numbers support Federal Reserve’s policy statement earlier in the week, which indicated that the Fed is prepared to continue hiking short-term interest rates, albeit at a slower pace, if inflation remains elevated. Fed Chair Powell reiterated that rate cuts in 2023 are unlikely, contrary to the bond market that is pricing in expectations for lower rates before the end of the year. The Federal Open Market Committee (FOMC) voted unanimously to raise the federal funds rate by 0.25% to a target range of 4.50 – 4.75%, a deceleration from the previous hikes of 0.75% and 0.50%, respectively.

The bond market had a volatile week as rates plunged following Powell’s press conference, only to whipsaw higher after the strong employment and ISM Services reports. Rates are higher on the week and the yield curve remains inverted, with the two-year Treasury at 4.30%, the five-year Treasury at 3.66%, and the ten-year Treasury at 3.53% as of this writing.

Next Week:

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