MANHATTAN (CN) — An unbelievably strong jobs report caught Wall Street by surprise, bolstering investors’ fears that the Federal Reserve will keep its thumb pressed on the interest rate scale.
The U.S. economy netted 517,000 new jobs in January, according to the U.S. Bureau of Labor Statistics, much more than the 185,000 jobs many experts had forecast. The unemployment rate is now at 3.4%, a 40-year low, and unemployment claims for the week ending January 28 showed a slight decrease from the week before, from 186,000 to 183,000.
Most of the gains in the private sector were among the leisure and hospitality space, which saw 128,000 jobs gained; professional services, which picked up by about 82,000 jobs; and private education and health services, which saw a 105,000-job increase. Government jobs also increased by 74,000 last month.
Stock futures plummeted when the report came out before the opening bell Friday morning, and by the end of the week’s trading the Dow Jones Industrial Average had dropped 55 points. The S&P 500 and Nasdaq continued to gain, increasing 66 points and 385 points, respectively.
“The undeniably strong report is what markets hope for coming out of a recession, but not what you want to see when expectations for the end of the Fed rate hike campaign is suddenly challenged by significantly stronger labor market,” said Quincy Krosby, chief global strategist for LPL Financial.
The surprisingly good jobs report was preceded by a disappointing payroll report on Thursday, when payroll company ADP released data showing the private sector gained 106,000 jobs last month while wages picked up 7.3% compared with January 2022. This marks the smallest increase in two years, as well as a big disparity with the 180,000 jobs most expected. A deep dive into the report also could portend further labor market weakening throughout the year.
The services sector gained all of the jobs, while manufacturers actually lost 3,000 jobs last month. Job gains were fairly consistent among U.S. regions except for the Midwest, which saw 40,000 jobs lost. Similarly, mid- and large-sized businesses gained 64,000 jobs and 128,000 jobs, respectively, while companies with fewer than 50 employees let go of 75,000 jobs.
ADP Chief Economist Nela Richardson blamed weather-related disruptions for the lukewarm hiring in certain sectors and areas —likely referencing heavy snow storms in mid-January — and said hiring during the remainder of the month was as strong as it was during January of last year.
“In a job market where labor supply is exceptionally tight, it’s a concerning sign that small businesses are downsizing,” said Peter Essele, head of portfolio management at Commonwealth Financial Network. “It’s possible that the small business trend as of late is the canary in the coal mine for what’s in store with the rest of the economy in the months ahead.”
Investors had been hoping for receding jobs data, which would have given the Federal Reserve reason to stop hiking interest rates, but with the labor market remaining so strong that is unlikely to happen.
As it stands, the Fed already has begun to pare back its interest rate increases. On Wednesday the central bank announced it would increase the federal funds rate by 0.25%, which now sits at 4.25% to 4.75%. While hopes initially were that this could mark the last interest rate hike by the Fed, that now seemsunlikely.
“We have covered a lot of ground, and the full effects of our rapid tightening so far are yet to be felt,” Fed Chair Jerome Powell said during the subsequent press conference. “Even so, we have more work to do.”
The Fed meets next in March, when it is now expected to raise rates again by 0.25%. “We’re going to be cautious about declaring victory, and, you know, sending signals that we think that the game is won,” Powell said. “It’s the early stages of disinflation … but we just see that it has spread through the economy, and that’s going to take some time, after all.”
Other central banks also raised their interest rates this week. On Thursday, the European Central Bank raised its interest rates for the fifth time since last year, though it was to the tune of 50 basis points. Also like its U.S. counterpart, the ECB noted that it “will stay the course” on interest rate hikes and “expects to raise them further” in an effort to get inflation to its 2% medium-term target.
The Bank of England voted 7-2 meanwhile to increase its own interest rates by 50 basis points to hit 4%, the bank’s 10th consecutive hike in interest rates. Notably, the central bank is no longer saying it will “forcefully” try to combat inflation, indicating to some experts this may be its final increase in interest rates for a while.
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