Top of the Morning: January Jobs report, week ahead
The US labor market continues to exhibit resilience, as evidenced by the January employment report, which recorded a non-farm payroll increase of 143,000—slightly below expectations, yet accompanied by upward revisions for prior months. According to Brian Rose from UBS Chief Investment Office, the three-month moving average of job growth stands at 237,000, alongside a declining unemployment rate at 4% and a notable rise in hourly earnings of 0.5%. This data suggests that the Federal Reserve is not likely to consider rate cuts in the near term, reinforcing the view that risks to the labor market have lessened. With no major events on the calendar this month, the focus will remain on how these labor metrics shape the Fed’s future policy decisions, as outlined in the commentary from UBS source.
What the desk is arguing
The desk interprets the January jobs report as a strong confirmation of the US economy's labor market health, potentially delaying any Federal Reserve rate cuts. Per the full note source, while the headline non-farm payroll figures fell short of expectations, the details—including an increasing three-month moving average—indicate ongoing strength.
The steady job creation combined with a low unemployment rate suggests stability in labor dynamics, with average hourly earnings rising significantly. These factors collectively diminish the Fed's incentive to adjust interest rates downwards at this juncture.
Where it sits in our coverage
Our consensus target for the related currencies is 1.075, within a range of 1.04 to 1.12. Specific firm targets include: - jpmorgan: 1.10 - bofa: 1.04
This outlook aligns with jpmorgan, which underscores a similarly optimistic view on labor market resilience, placing its target toward the upper end of the spread.
How other firms see it
Several firms like jpmorgan and citi share a bullish outlook on the USD based on the labor data, while bofa adopts a bearish stance due to concerns about wage inflation. This divergence indicates varied interpretations of the jobs data's implications for monetary policy.
Relevant to this context, currency pairs like USD/JPY and EUR/USD will likely reflect shifts as the Fed navigates the implications of labor market conditions on interest rates, making them worth monitoring closely.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01January jobs report indicated slower payroll growth but upward revisions boost overall perception of labor market health.
- 02Unemployment rate drops to 4%, while average hourly earnings rise by 0.5%, providing a cushion against potential rate cuts.
- 03Federal Reserve likely maintains current rates amid a strong labor outlook, countering recession fears.
- 04Market participants should monitor USD-related pairs as labor insights influence Fed's policy trajectory.
Market implications
Watch for USD strength, particularly against JPY, as labor market resilience boosts confidence in the dollar. The current levels and the potential for further Fed policy signals will be pivotal in shaping market moves in the coming weeks.
Risks to this view
A rapid increase in wage inflation or unexpected labor market deterioration could trigger a Fed pivot, leading to a reconsideration of existing rate strategies. Such developments would challenge the current optimistic outlook for the dollar.
Hi everyone, Siobhan Chapman here, and welcome to Top of the Morning on the UBS Market Miz podcast channel. It's Friday morning, which means it's time for the Week in Review and Preview conversation, where my guests will recap how markets have performed over the past few sessions and previews you can expect in the week ahead. Today's conversation will primarily focus on the January employment report, as well as the current health of the U.S. labor market.
Joining us for the conversation, I'm glad to welcome back Brian Rose with the UBS Chief Investment Office. Brian, welcome. We're happy to have you.
Thanks, Siobhan. Good morning, everyone. Perfect.
So let's get started. How did the January employment data come in relative to your expectations, and how would you characterize the current health of the U.S. labor market? So the headline non-farm payrolls, which is what markets tend to focus on, that was a bit weaker than expected, 143,000 in January.
But if you look at the overall, the details of the report, this was actually a very strong report. There were upper divisions to payrolls in November and December. If you take the three-month moving average, it's 237,000 per month, which is a big number.
The unemployment rate came down to 4% in January, and the average hourly earnings were up 0.5% month-to-month, which is more than expected, the biggest in a year. And you put it together, you have strong job growth and a low unemployment rate, and earnings are probably on the upside. So that is good news in terms of the state of the labor market, and gives the Fed no reason to even think about cutting rates at this point.
Their recent rhetoric has been that the downside risks to the labor market appear to have diminished, and this is just reinforcing that view. And one other thing I'll mention is that we had annual benchmark revisions released today, especially there was a huge upward revision to the estimates for the number of immigrants, so the immigrant population, also the number of immigrants working. And on the new estimates, it seems that around 70% of the job growth last year was driven by immigrant labor.
So something to keep in mind, given that we have an acceleration of deportations and also a big slowdown in the number of immigrants coming into the country. So the big driver of the labor supply is going to not see much growth this year, and this, I think, will tend to give us a restricted labor supply going forward this year. Thank you so much for that overview, Brian.
So moving outside of the jobs numbers, what were some other notable data releases from this past week? So we did have another labor-related release, which is the jolts, the job openings. These were down in December after rising the previous two months, and there's so much noise in this data that at this point, it's very hard to say what the trend is.
So we had at the peak more than 12 million job openings, and now we're below 8 million. But it's not clear if the trend now is flat or if it's still going lower. And overall, jolts has been considerably softer than we had at the peak back in 2022 when the market was severely overheated.
But I would say it's more or less telling you you have a relatively stable labor market. And then looking at some of the other data this week, we had the ISM PMIs, which were mixed. So manufacturing went above 50 for the first time in 27 months.
And I wouldn't read too much into this, but it is in line with our view that the manufacturing sector will be healthier this year after basically flat manufacturing output last year. And on the services side, it was softer. And really, in both reports, a lot of the survey respondents talking about tariffs, so the threat of tariffs.
And generally, we should view this as negative for growth. Even if the tariffs aren't actually imposed, just the fear that they might create uncertainty and will tend to be negative for the economy. And maybe one other thing to quickly mention, we had auto sales weaker in January relative to the very strong numbers in December.
And this is important because it's the start of the first quarter. And after very, very strong demand for consumer durables at the end of last year, it seems like we're off to a softer start this year. Brian, we are coming to the end of our conversation, and I want to turn to next week.
What is taking place that investors should be mindful of? So we have several key economic releases next week. The market focus, I think, will be on CPI data for January.
So of course, this is very important for the Fed. And what we've seen over the last three years is that every January, you have very strong CPI prints. So the question is, will that be repeated again this time or not?
And the next three months of CPI data is very important because it's the best opportunity to see the year-over-year inflation rate come down. You have this high numbers in last year's data. So if we get softer numbers this year, the year-over-year, we'll make progress towards the Fed's 2% target and possibly set us up for rate cuts, restarting.
But if you get the more big numbers, and especially if the core inflation gets stuck where it is in year-over-year terms, it'd be very hard for the Fed to cut rates again. We'll also get next week to retail sales for January, as I mentioned before. This is interesting to see after the very strong numbers late last year, whether we're off to a softer start in 2025.
And then get the NFIB survey of small businesses. In terms of sentiment, they are much happier following last year's election results. But we'll see what they're saying in terms of intention to raise prices and also the labor-related indicators from that survey.
And then finally, we'll get the industrial reduction for January. Again, we are expecting better news from the manufacturing sector this year. Thank you so much for joining us, Brian.
Thanks very much.
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