Surprising official data has showed US non-farm payrolls gained a massive 517K in January, against consensus expectations for an addition of just 189k. Far from falling month on month, this constituted a more than doubling of December’s 223K gain.
The unemployment rate came in at 3.4% (consensus: 3.6%) versus 3.5% in December. Average hourly earnings meanwhile rose 0.3% on the month (consensus: +0.3%), against a 0.3% gain in December.
So that must be good news for the US economy, right?
Not so fast. Despite this shock data, Rob Clarry, Investment Strategist at Evelyn Partners, advises caution in reading too much into the headline figure. NFP data is always noisy in January because a series of methodological changes are made at the start of each year. More focus should be placed on the earnings data, which rose 0.3% month-on-month – in line with consensus and last month’s reading. So, the high headline reading does not appear to be translating into further inflationary pressure – an important finding for the Fed.
Should we be worried then?
“The data might still be unsettling for traders and investors, coming as it does after last night’s disappointing tech figures,” admits Clarry. “Investors were hoping for further indications of a softening US labour market that might permit the US Fed to moderate its rate hikes – and while this doesn’t necessarily spoil that narrative yet, it might discourage the interpretation that there will be just one more 0.25% hike before the Fed’s much-discussed ‘pause’.”
Will this change the Fed’s posture?
The FOMC was careful to sound hawkish alongside its 0.25% rate hike this week, and while some continue to see a softening in monetary stance, it can be fruitless to try and overinterpret Fed statements. This data indicates there is a long way to go before the Fed can feel comfortable about the state of the labour market.
- Trump and tariffs: what’s the forecast for US equity markets?
- Mexican peso under further pressure against strong USD
- 2025, The Year of Reckoning and Disruption
Where does the US labour market stand now?
Job openings increased in December, reaching their highest level since July. “This suggests that despite layoffs in the tech sector, firms are still looking to hire,” Clarry said. “The ratio of unemployed per job opening increased to 1.9, its highest point since July. Also, with the employment cost index – which measures changes in total compensation costs for businesses – still at an annual 5.1% in Q4 this remains well above the Fed’s nominal wage growth target of 3.5%.”
What you need to know about Non-Farm Payrolls and why they are important
- It measures the number of US workers – broadly workers outside the farming sector, which can be seasonal
- It is used as an indicator by investors and the Fed of the relative health of the US economy
- The NFP number is calculated by the US Bureau of Labor Statistics
- The data also shows which sectors in the US economy are expanding and contracting
- It even measures wages and wage growth which can affect thinking on US base rates
As pointed out by Rob Clarry above, the figure today is well above the forecast figure, which has caught traders on the hop. Leisure and hospitality were the leading sectors in employment growth.
There continues to be a sense of growing optimism in the market as we go into the end of the week. Some analysts are saying this is too good to be true. Yet metrics like this are starting to make the case for a more robust economy, at least in the US.
