President Joe Biden issued a statement Friday celebrating the latest blowout jobs report. They showed “another month of strong wage gains and employment gains of over 350,000 in January, continuing the strong growth from last year,” it read.
But below the surface these latest jobs figures may yet prove unhelpful to the president’s re-election campaign. That’s because they pose not one but two possible risks that could prove a headache in the months leading up to November: the risk of more inflation, but also the risk of a recession.
The nonfarm-payrolls numbers in January were double what economists had been expecting. So, too, was the rise in hourly earnings.
These figures are good for workers and for job hunters. But they raise the concerns that Federal Reserve chair Jay Powell’s economic medicine is not yet working the way it’s supposed to, and that the economy is not cooling off.
“Wages came in hot at 0.6%, which is the highest release since March 2022,” writes Jeff Schulze, head of economic and market strategy at ClearBridge Investments, in a note to clients. “This reading, coupled with the overall jobs number, effectively takes a March rate cut off the table and should raise fresh concerns about the potential for a reacceleration of inflation.”
You can see this very clearly in the markets’ reaction to the data. The futures markets, which bets on future interest rates, just slashed bets yet again on early interest-rate cuts. It is also cutting its estimate for rate cuts in the second half of the year. If inflation just won’t lie down, Powell may have to keep rates higher for longer.
A month ago, the futures markets foresaw the Fed cutting interest rates by about 1.25 percentage points between now and its September meeting (the last one before the election).
Its best guess now? Between 0.75 to 1 point. Maybe.
The market now gives a 10% chance that Powell will be able to cut no more than 0.5 point. Just a day ago, it put that probability at 0%.
Then there’s the interest rate that the Fed doesn’t control (directly, anyway), but which has an even bigger influence on the economy: that of the 10-year Treasury note
The jobs figures sent the yield on the 10-year — under 3.9% just moments before — leaping above 4%.
The 10-year rate isn’t just a critical benchmark for corporate borrowing and the financial markets; it’s also the key rate use..
