Highlights:
- January payroll employment rose a stronger-than-expected 304K following a 22k gain in December.
- The unemployment rate rose to 4.0% from 3.9% though the increase reflected the transitory impact of the government shutdown.
Our Take:
January payroll employment growth unexpectedly accelerated to a robust 304k which was almost double the 165k expected going into the report. The solid gain in payrolls will likely temper rising market expectations of the Fed remaining on hold indefinitely. These expectations emerged following statements coming out of this week’s FOMC meeting implying less urgency, if not the absence of any necessity, to tighten further. However, with the economy at capacity, the pace of hiring needs to drop to a pace consistent with new entrants coming into the labour market that is around one-half of the gain reported for January. The persistence of robust hiring implies an economy going even further into excess demand with a rising risk that the upward trend in wage gains will start to move into inflationary territory. To ensure that this risk does not materialize, our forecast assumes modest further tightening by the Fed this year with the fed funds range rising a further 50 basis points with the upper end of the range finishing 2019 at 3.0%. However, Fed comments this week suggest that the bar has been raised as to sufficient indication of these risks materializing.
