Consumer inflation expectations jumped amid Trump tariff threats, the University of Michigan consumer sentiment index showed on Friday. That followed a January jobs report which was, on balance, on the hawkish side for Fed policy as the unemployment rate fell to 4% for the first time since May. The S&P 500 reversed lower after the report on inflation expectations, while Amazon fell after its Q4 earnings report and outlook.
The January jobs report showed that hiring cooled a bit last month, but winter weather and the Los Angeles fires may have played a role. Big upward revisions to prior data show that hiring is on firm ground. The Fed was already expected to pause for several months as it waits for clarity on President Trump's policy agenda. Some policymakers have indicated they're watching inflation expectations closely.
Jobs Report Hits And Misses
The U.S. economy added 143,000 jobs last month, including 111,000 in the private sector. Economists were forecasting 168,000 new jobs, with 140,000 private jobs.
However, job gains for November and December were revised up by a combined 100,000. That means the overall hiring level is even better than economists had predicted.
The unemployment rate's dip to 4% came as economists expected a steady 4.1% rate.
Meanwhile, average hourly earnings jumped 0.5% in January, above the forecast 0.3%. Year-over-year, hourly earnings rose 4.1%, easily ahead of 3.8% forecasts.
Inflation Expectations
The University of Michigan's consumer sentiment index unexpectedly fell to 67.8 from 71.1 in January. Inflation expectations for the next 12 months jumped to 4.3% from 3.3%, the highest since November 2023.
Longer-range inflation expectations ticked higher to 3.3% from 3.2%. The Fed would be more concerned if long-term inflation expectations become unanchored, because that would be more likely to influence the behavior of consumers and businesses.
Oliver Allen, senior U.S. economist at Pantheon Macroeconomics, wrote that the University of Michigan survey was compiled before President Trump temporarily shelved 25% tariffs on imports from Mexico and Canada.
Allen noted that 3.3% is the highest figure for long-term inflation expectations since 2008. "This will provide the FOMC another reason to tread carefully with further easing in 2025."
Reaction To Jobs Report: No Fed Rate Cut Soon
Seema Shah, chief global strategist at Principal Asset Management, wrote that the headline payrolls number was "slightly disappointing." Yet "the broader picture is still one of labor market resilience and sustained wage pressures."
She added: "As the Trump administration's policies have the potential to significantly impact both the labor market picture and the inflation outlook, there is every reason to keep rates on hold for now."
Updated Fed Rate-Cut Outlook
The potential that colder-than-normal weather and L.A. fires temporarily weighed on hiring, in combination with the upward revisions and unemployment rate drop, makes the report somewhat hawkish for Fed policy.
Markets now see just 8.5% odds of a rate cut at the March 19 Fed meeting, down from 16% on Thursday. Odds of a rate cut at the May 7 meeting have slumped to 29% from 39%.
Markets still see above-even odds (57%) of a rate cut at the Fed's June 18 meeting, though down from 65% on Thursday.
However, markets are now leaning toward just one quarter-point rate this year, with 47% odds of at least 50 basis points in cuts, down from 58% on Thursday.
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More Jobs Report Details: Short Workweek
The average workweek shortened by 0.1 hour to 34.1 hours in January, which was the shortest since March 2020 as Covid hit.
Were weather and fires a factor? Maybe. But the BLS said that Southern California wildfires and severe winter weather "had no discernible effect" on hours, employment or earnings.
Because bad weather and other disruptions have more of an effect on hourly workers than salaried workers, they tend to temporarily boost wages.
Which Industries Hired In January?
Health care employment rose by 43,7000. Retailers added 34,300 jobs. Computer systems design jobs rose by 13,700.
Goods producing jobs were flat, as small increases in construction and manufacturing employment were offset by fewer mining jobs.
On the downside, food services and drinking places shed 15,700 jobs and temporary help services 12,400 jobs.
Government payrolls rose by 32,000, including 23,000 at the state and local level. Federal government jobs rose a seasonally adjust 9,000, though this category could start seeing significant drops starting in February amid aggressive efforts led by Elon Musk to cull federal payrolls.
Population Update
The Bureau of Labor Statistics, which adjusts population estimates each January, said that new data show the population is 2.9 million higher than its December estimate. That includes 2.1 million labor force participants, meaning they're working or looking for work, and 2 million additional workers.
Increases were "relatively large for Asians and Hispanics," the BLS said.
Smaller Revision To Job Gains Through March '24
The BLS had previously indicated that payroll gains in the 12 months through March 2024 would be revised down by 818,000 based on more comprehensive counts of payroll jobs from the Quarterly Census of Employment and Wages that is derived from unemployment insurance records.
Yet on closer examination, the downward revision was only 589,000, which means that 2.346 million payroll jobs were added in the year through last March.
S&P 500
The S&P 500 initially edged higher after the jobs report, but reversed 0.7% lower in afternoon stock market action, following the inflation expectations release at 10 a.m. ET. Amazon stock is 3.6% lower on disappointing guidance.
The S&P 500 rose 0.4% on Thursday to extend its win streak to three sessions. Thursday's finish was 0.6% below the Jan. 23 S&P 500 record closing high.
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