Could NFP Drive FOMC To Cautious Stance On Rate Hikes?

Friday’s NFP data by the US Bureau of Labour Statistics showed that Nonfarm Payrolls surged by 517K in January, above market consensus. The figure pushed the US dollar forward to rally. Analysts point out that there is still plenty of additional economic data from the beginnings of February till March’s FOMC meeting, including another employment report and two more CPI reports, but even after accounting for the flattering seasonal effect on January payrolls, Fed could stick to a hawkish mood.

Seasonal adjustment factors appear to have flattered the headline as smaller-than-usual post-holiday layoffs bolstered the payrolls numbers. But the unusually few layoffs that translated into such a strong headline gain is indicative of what remains an incredibly strong jobs market, and other details of today’s report underscored this strength.

Revisions increased the level of employment over the past two years and showed stronger hiring momentum heading into 2023. At the same time, the unemployment rate fell to 3.4%, the lowest reading since 1969. Average hourly earnings growth remained solid and registered a 4.6% annualized rate over the past three months.

FOMC is expected to be cautious in reading too much into the magnitude of January’s payroll gain, but the firm pace of average hourly earnings growth and a 53-year low in the unemployment rate should keep a 25 bps rate hike at the March 22 FOMC as the base case and another possible increase in May is to be expected as well.