Jobs Report: Hot Hiring, Lower Jobless Rate Lift Fed Rate-Hike Odds; S&P 500 Falls

The jobs report showed that hiring surged and the jobless rate fell, which means that the Fed is more likely to raise rates.

In January, employers created 517,000 new payroll positions. The unemployment rate also fell to its lowest level in half a century, at 3.4%. Wage growth, which is crucial to inflation forecasts and Fed rate increases, has remained moderate. The S&P 500 recovered from its early losses after the jobs report but slowed down in the stock market's Friday afternoon action.

ET lifted the S&P 500 from its early lows.

The private sector added 443,000 positions and the government added 74,000.

As expected, the average hourly wage increased by 0.3% in a single month. As expected, the annual wage growth slowed to 4.4%.

The combined job gains in November and December have been revised upwards by 71,000.

The unemployment rate dropped to 3,4%, despite expectations of a rise to 3,6%.

The Labor Department's monthly employer survey provides the headline figures for employment and wages. Separate household surveys provide information on labor force participation, employment status and unemployment rates.

The data from the household survey reflects an annual update of population, so changes in comparison to December may be misleading. Even with the population increase of 1.1 million, the number of unemployed dropped by 28,000. The total is now 5.69 million. The rate of labor force participation increased to 62.4%.

The strong hiring numbers may be due to seasonal adjustment issues. This is because the holiday hiring was softer than usual, which may have led to fewer layoffs than normal in January. Retailers, for example, cut 45,600 positions in November but added 30,100 jobs in January, on a seasonal adjusted basis.

UBS economist Jonathan Pingle pointed out that the resolution of a 36,000-worker strike and warm weather contributed to January’s large payroll increase.

Even without these artificial boosts, hiring appears solid. At least in part, the new low unemployment rate for the household survey of 53 years seemed to confirm the strength shown by the employer survey.

In January, the Institute for Supply Management Services index rose 6 points to 55.2, recovering from December's drop below 50 that indicated contraction activity. The new order index jumped to 60.4, up from 45.2. The gauge for prices fell to 67.8 compared with 68.1, showing a slower growth.

S&P 500 stocks fell 1% on Friday morning following the employment report. The S&P 500 started off down by 1.2%, before briefly moving into positive territory.

The 10-year Treasury yield rose 12 basis points, to 3.52%. It had hit a four-month low earlier in the week.

The S&P 500 closed at its highest level in late August, a 1.4% increase. The Nasdaq Composite, which has been on fire since January 1, surged by 3.25%, reaching its highest closing since mid-September.

The S&P 500 closed Thursday at a 16.85% gain over its October 12 low. However, it was still 12.9% lower than its all-time high.

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Fed Chair Jerome Powell appeared to grant the S&P 500 a license to keep moving upwards on Wednesday. Powell, despite the Fed's statement reiterating its guidance of at least two additional rate hikes, said that he is not concerned about a loosening of financial conditions as stocks rise and Treasury yields drop. The Fed is no longer in a panic mode because inflation and wage growth are now at levels that don't cause as much concern. However, these trends must continue if the S&P 500 is to continue its rally.

Before Friday's job report, the markets had placed 66% odds on the Fed's last quarter-point rate increase in March. After the report, odds of another rate hike in May increased from 34% to 54%. The odds of a hike in March increased to 97.5%, up from 83% on the previous day.

The Fed will be happy that wage growth has continued to moderate at 4.4%. Pingle did note that the 0.3% growth in average hourly wages last month was partly due to the composition of workers: The highest wage increases were for lower-paid workers.

The Fed prefers to use the quarterly Employment Cost Index because it corrects for these effects. He wrote that, when composition effects are excluded, the average hourly wage grew by 0.4% in January.

The Fed will not be pleased to see unemployment rates fall to 3,4%. Fed projections from December indicated that the U.S. Central Bank would need the unemployment rate to reach 4.6% before it began to reduce its rate increases.

Powell said in his press conference that Fed risk management argues against making policy too strict.

He said it was difficult to manage the risks of doing too little, which could result in inflation.

"We do not have the desire or incentive to tighten too much." He added, however, that the Fed can use tools to support growth if necessary.

The average workweek increased to 34.7 from 34.4, reversing recent decreases. A longer workweek combined with strong hiring led to a 1.2% increase in the total number of hours across the economy. This number is important, because the aggregate weekly hours had decreased in each of three previous months. The declines were smaller in October (0.3%), and in November and in December (0.1%).

Some economists believed that the U.S. had entered a recession because of the weak trend in the number of hours worked. This view is challenged by the January jobs report.

After falling by a total of 89.400 in the two previous months, temporary jobs increased by 25,900. This reversal could have been due to seasonal adjustments.

The leisure and hospitality sector saw a 128,000 increase in employment. Jobs in health care and social services increased by 79.200.

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