Surprise!
Weekly Bond Commentary
In a heavy week for economic data, the main takeaway is that the U.S. economy continues to perform, and to surprise. The monthly payroll report showed job gains of 353,000 in January—nearly double expectations—and the prior two months were revised 126,000 higher. Both the unemployment rate and the labor force participation rate held steady, at 3.7% and 62.5%, respectively. Average hourly earnings rose 0.6% in January, and 4.5% over the last year. Broad-based gains were led by private education and health, but there were also solid gains in professional and business services. Manufacturing jobs rose 23,000, and those in retail and trade and transport also jumped.
Absent a sudden economic or employment about-face, this report pushed hopes of a March fed funds rate cut out the window, mudding the easing waters this year. At its FOMC meeting last week, the Federal Reserve did not change the fed funds rate, but Chair Jerome Powell made it clear that nearly all Fed members expect to cut rates in 2024. The question is when? Excellent progress has been made on bringing down inflation, even as the labor market has remained strong and economic growth has been robust. Powell said policymakers’ effort to subdue it will continue, reiterating that they need to see solid progress toward the 2% inflation target over a 12-month period in order to gain confidence in cutting. While Powell said a rate cut in March is unlikely, a great deal of data will be released before then.
Some of the data they will consider also has been hot. Consumer confidence rose sharply in both major surveys, and national manufacturing measures point to increasing strength. The Conference Board present-situations index jumped from 147.2 to 161.3, the expectations index rose from 81.9 to 83.8 and the 12-month expected inflation rate fell from 5.5% to 5.2% in December. The University of Michigan consumer sentiment survey held at its highest level since July 2021, reflecting improvements in both inflation and personal incomes. Respondents' year-ahead inflation expectations eased further. Buoyed by the strong labor market, the confident consumer underpins continued solid economic growth.