While we think labour-market pressures will lesson, latest jobs report paves way for quarter percent Fed rate hike in March.

Pictet Wealth Management Asset Allocation & Macro Research.

The Fed can only feel vindicated in its assessment that the labour market is at or very close to full employment after January’s employment report, helping it justify a rate hike at the March meeting, as it signalled at the January meeting. Yet, we still do not think the labour market is showing particular exuberance necessitating 50bps instead of a more gradual 25bps rate move then. Omicron seems to have had a limited impact so far (despite a sharp increase in absent workers in January), but broader macro data such as GDP is still likely to take a hit in the first quarter.

The January nonfarm payrolls report showed employment rose by 467,000, while December’s data was revised up to 510,000. The unemployment rate increased by 0.1 point to 4.0%— but for ‘good’ reasons as the labour force increased more rapidly than employment (the participation rate ticked up to 62.2%). Underlying technical details such as solid employment gains in cycle-sensitive sectors and positive data revisions suggest that US recession risks remain low in the near term, although the US business cycle is still at the mercy of Federal Reserve’s monetary-tightening pace.

We continue to forecast a 100bps hike in the Fed funds rate in 2022 overall, but the risk remains to the upside if wage growth continues its abrupt ascent. But here, the January nonfarm payrolls report sent an ambiguous message. While wage growth was still-high overall (unadjusted wage growth was 5.7% year on year (y-o-y) to reach an average USD31.6 per hour), there were early signs of some ‘cooling’ in the hottest sectors such as leisure and hospitality (where wage rose only 0.1% in January over the previous month.

Furthermore, immigration looks to be bouncing back sharply (the foreign-born in the US rose by 452,000 in January, or +3.5% y-o-y), which, if sustained in coming months, could help alleviate the acute worker shortages in many sectors. The decline in covid-19 cases seen very lately could also help lubricate the job market in February.

Our view is still that the US labour market will be less rigid going forward as absent workers return to work as the Omicron wave fades, while a bounce in immigration will also help to meet the acute demand for workers in many sectors, especially in services. Less fiscal policy support could also play a role, although not necessarily central, in pushing past workers to return in the labour force.