Bullish US jobs data portend more rate hikes to come

I am writing these first paragraphs ahead of the jobs numbers that come out at 8:30am ET. And the expectation is for 180,000 jobs added and an unemployment rate steady at 4.1%. Given the raft of bullish data we have seen of late, a miss might be seen with relief whereas numbers ahead of expectations will increase bond-bearish sentiment, now beginning to feed into the equity markets.

The data from yesterday — the ISM and the Atlanta Fed GDPNow tracker — showed a US economy definitely accelerating into the 3% growth range. The ISM data were particularly important because they showed strength in producer price inflation amid a situation where inventories have dipped too low. The upshot here then is that US firms in the sector will want to rebuild inventories even as they face cost pressures. And this is something that could be passed through to consumers, galvanizing the Fed to increase the pace of its tightening campaign.

Jobs were a weaker point in the ISM survey as the number declined from 58.1 to 54.2 in January. With the ADP job numbers earlier in the week coming in strong, there is a lot of anticipation built into this report.

OK. It’s time. Here are the data:

  • Non-farm payrolls: up 200,000 versus 180,000 expected
  • Average hourly earnings, monthly: up 0.3% on the month
  • Average hourly earnings, yearly: up 2.9% in the year, the most since 2009, an 8 1/2-year high, up from 2.7% and 2.6% expected
  • Labor Force Participation: remained steady at level at 62.7%

Key data point: the 2.9% annual rise in average hourly earnings is the piece of data that will most move the Fed. The Fed will want to move against inflation pre-emptively. With producer prices up and wages now rising nicely as well, the stage is set for a more aggressive Fed.

Bottom line: These numbers are bond bearish. They support an acceleration of rate tightening by the Fed.

My view: As I indicated last month, at this point we should be expecting some modest curve steepening not continued flattening, with the long end under-performing because it’s the booming economy that is driving yield changes. The questions now are the following:

  1. Does producer price inflation feed through into consumer prices?
  2. Does core PCE inflation, the Fed’s preferred inflation, measure tick up now?
  3. Will the Fed add a fourth rate hike this year?
  4. How long can this acceleration last?

My baseline is that the economic acceleration starts to unwind mid-year, with the curve beginning to flatten by then. But acceleration could last longer — and that would invite a larger tightening cycle — and greater chance of a hard landing.

Watch: The GDPNow tracker for Q1 is a good signpost. It is now tracking at 5.4% growth, which is off the charts bullish. If the numbers stay above 3% as the quarter progresses, the likelihood of a second rate hike by June becomes almost certain and the likelihood of a fourth rate hike this year increases.

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