Recap from last week: The US labor market remains solid in January.
The Jan jobs data indicates that US labor market conditions remain solid, maintaining a mostly positive signal for the overall economy.
At the last FOMC meeting, Fed Chair Powell characterized the US labor market as “pretty stable and broadly in balance”. He acknowledged that it is a “low hiring environment” but that the unemployment rate had been “pretty stable now for a full half a year”. While data revisions cloud the view, the Jan labor market report shows little change in those conditions.
Payroll growth slowed to +143k in Jan (expecting +154k); private sector jobs increased by +111k and govt by +32k. Services-providing industries accounted for all of the private sector job growth in Jan – but slowing from a more sizeable increase of +275k in Dec. The overall annual benchmark revision to the level of payrolls was slightly smaller than expected, but still resulted in the 12-month average payroll growth slowing from +186k to 166k in Dec. The Jan payroll growth remained slightly below this lower average benchmark. However, the upward revision to payroll growth of +100k in the last three months of 2024 suggests some stronger momentum through to the end of last year. The overall hiring rate remained stable at the end of Dec.
The unemployment rate fell to 4% in Jan from 4.1% in Dec. This was a positive development given that both participation and employment (using the employment-to-population ratio) increased in Jan. Other measures of unemployment also reflected slightly more positive, stable conditions.
Several pieces of labor force data stand out and will need to be monitored amid the noisy and heavily revised data this month. The first is the notable 7% fall in job openings at the end of Dec. Because these data are subject to revision, it is unclear whether, combined with slower payroll growth in Jan, they suggest some softening in labor demand.
The second area to be monitored is the further fall in aggregate and average weekly hours worked. Aggregate hours worked in private payrolls have declined in the last two months, falling by -0.2% in Jan (but also fell by -0.5% in Jan a year ago) and by -0.1% in Dec. Average weekly hours also declined in both Jan and Dec. One reason for the fall in Jan aggregate hours worked could be due to the notable increase of 573k people “employed but not at work” due to weather. However, this explanation doesn’t account for the fall in aggregate hours in Dec, which is also not consistent with the upward revision to the Dec payroll growth.
Finally, growth in average hourly earnings was firmer in Jan, increasing by +0.5% in the month from +0.3% in Dec. The annual rate lifted slightly to +4.1%. The Fed will need to watch how this evolves beyond Jan.
US ISM and S&P PMI surveys for Jan shifted back into alignment. Both surveys indicated some improvement in manufacturing activity while the larger services sector, despite staying positive, recorded a notable moderation in momentum. This is also consistent with the slowdown in services payroll jobs in Jan. The Atlanta Fed GDP nowcast of Q1 US GDP growth is currently at +2.9%.
The Global S&P PMIs mirrored that shift in the US, as global manufacturing output PMIs shifted to reflect marginal growth expectations, while services momentum moderated, but stayed positive. While the composite output expansion did moderate in Jan, indicators of future output optimism continued to improve, as did the employment index. Both input and output price indexes also firmed.
The BoE cut rates as expected, albeit with a surprising 7-2 vote (two members preferred a 50bps cut). The Committee cited sufficient disinflation progress as justification for the rate cut. Growth had also been weaker than expected. While higher energy prices pose some upside risk to headline inflation in the outlook, underlying inflation is projected to ease. The BoE will maintain a somewhat restrictive policy stance while inflation risks subside further, following a gradual and cautious path of rate reductions.
Outlook for the week ahead; US CPI & retail sales, Fed Chair Powell testimony.
With stable labor market conditions supporting the Fed while it keeps rates on hold, the focus this week shifts to assessing progress on inflation and what it means for the path of US rates. The latest US retail sales and industrial production data will provide a more robust update to the Q1 growth rate. US Fed Chair Powell will also give two days of testimony this week. Outside of the US, Euro area and UK growth data will be in focus.
Key factors to watch this week;
US CPI and PPI for Jan will provide a guide for how the Fed-preferred PCE inflation report for Jan is likely to evolve. The FOMC is looking for further progress on core PCE inflation, particularly year-over-year, before easing policy further. We’ll be watching how monthly core inflation compares to the higher readings from last year and importantly what it could mean for the PCE report in two weeks. While a single month’s data may not be decisive, the Jan figures follow two more benign core PCE readings from Nov and Dec. These CPI and PPI reports could therefore influence expectations for US policy rates, with softer or firmer data potentially shifting the current market pricing of rate cuts in 2025.
- US headline CPI is expected to increase by +0.3% over the month in Jan, down from +0.4% in Dec. The annual rate is expected to stay unchanged at +2.9%.
- US core CPI is expected to increase by +0.3% in Jan, from +0.2% in Dec. A year ago, core CPI recorded +0.4% over the month in Jan. Annual core CPI is expected to slow to +3.1% in Jan from +3.25% in Dec.
- The headline PPI is expected to be unchanged at +0.2% in Jan. The annual rate is expected to slow to +3.1% in Jan from +3.3% in Dec.
- Core PPI is expected to increase by +0.3% in Jan from 0% in Dec. The annual core PPI rate is expected to slow to +3.3% in Jan from +3.5% in Dec.
Fed speeches;
- Fed Chair Powell will give two days of testimony to the US House of Representatives and the Senate this week. The tone of questioning will be interesting given the change in administration. Chair Powell is likely to reiterate the key themes from his recent FOMC press conference; economy and policy settings in a good place, looking for further progress on inflation, and in wait-and-see mode on tariffs/policy measure impacts on inflation.
- Fed Governor Waller is scheduled to speak on Wed (stablecoins) and may touch briefly on the inflation data/outlook.
Update on US growth at the start of Q1;
- US retail sales for Jan are expected to be flat (0%) after increasing by +0.4% in Dec. The retail control sales result will be the important measure feeding into the GDP calculation – and this increased by +0.7% in Dec.
- US industrial production is expected to increase by +0.3% in Jan, down from +0.9% in Dec.
Tariffs;
- Uncertainty over the effects of US policy on the inflation outlook remains elevated – which includes the impact of budget, tariffs, and regulatory policy. While tariff threats were withdrawn last week, this situation continues to evolve. Late last week, President Trump threatened that reciprocal tariffs may announced this week along with tariffs on all steel and aluminium imports into the US. Tariffs on some Chinese imports are due to go into effect this week with China announcing retaliatory duties.
Outside of the US, Q4 growth data will be in focus for Europe and the UK.
- Euro area GDP for Q4 is expected to be confirmed at a stalled pace of 0% over the quarter and +0.9% over the year. Last week, the Euro area inflation report firmed in Jan as outlined by the ECB in the prior week. Services inflation stayed steady at +3.9%. Reporting by Bloomberg on a research paper by ECB staff regarding the neutral rate published late last week suggests that fewer rate cuts may be required to reach the neutral range (with the usual caveats).
- The UK Q4 GDP is expected to decline by -0.1% over the quarter, from 0% change in Q3.
This week, the US Treasury will auction and/or settle approx. $490bn in ST Bills raising approx. $30bn in new money.
QT this week: Approx $14.5bn of ST Bills will mature on the Fed balance sheet and will be reinvested.
More detail (including a calendar of key data releases) is provided in the briefing document – download the pdf below:
Comments and feedback are welcome. Please email me at kim.mofardin@marscapitalpartners.net
