Jobs report: 'Certainly a head scratcher,' Wall Street analysts react

·7-min read

January saw a stunning surge in job growth. The Labor Department's report for the month showed 517,000 jobs were added to the U.S. economy, drastically exceeding Wall Street's expectations.

The release showed hiring remained stronger than ever despite the Federal Reserve's campaign to loosen the labor market and curb inflation.

Many analysts bemoaned continued strength in employment over concerns it will serve as a sign to Federal Reserve officials to stay the course on their rate-hiking campaign. Some interpreted cooling wages as a sign of easing inflation and expressed concern that over-tightening could drive the U.S. into a recession.

“The key thing is that unemployment fell more than expected without wages spiraling out of control. That reduces the need for the Fed to further slam the breaks on the economy," said David Russell, VP Market Intelligence at TradeStation Group.

The unemployment rate dropped to 3.4% versus the estimate for 3.6%—the lowest jobless level since May 1969.

Following the release of the employment numbers, Wall Street analysts immediately got in touch to offer their thoughts. Here are their takes:

David Russell, VP market intelligence, TradeStation Group

“Certain areas that struggled during the pandemic, especially hospitality, are simply returning to their old levels. While the headline number of 517,000 was shocking, it doesn’t really derail the improving inflation story that’s emerged in recent months.”

Charlie Ripley, senior investment strategist, Allianz Investment Management

"Today’s payroll number is certainly a head scratcher for most market participants as the 517k gain was well above estimates along with the unemployment rate going the opposite direction the Fed would like to see. As expected, most of the job additions are coming from the service sector and particularly the leisure and hospitality sector. The silver lining for the Fed in a report like this would have to be the fact that wage pressures continue to ease as average hourly earnings on a year-over-year basis have declined from 4.8% to 4.4%. On balance, the latest labor market data accentuates the notion that monetary policy works with a lag, and it is going to take more time for the economy to feel the full effects of a 4.75% Fed policy rate."

Josh Jamner, investment strategy analyst, ClearBridge Investments

"A surge in jobs and hours worked helped pull aggregate weekly payrolls – a proxy for aggregate income that looks at jobs, hours, and wages and is closely linked to consumption – rose 1.5%, the strongest reading since August 2020 when the labor market was initially recovering from the pandemic shock and is stronger than anything seen in the decade prior to the pandemic or even leading into the GFC. Such strength is likely to curb how fast inflation can cool, as demand should be supported by higher income growth."

Richard de Chazal, macro analyst, William Blair

"This was a huge upside surprise and clearly raises some questions around the speed of any economic slowdown, as well as the timing of the Fed pausing rate increases and eventually starting to cut rates. While some commentators have focused on the non-seasonally adjusted decline of 2.5 million jobs, the reality is that this is very much in line with previous January reports, hence not much evidence of seasonal distortion."

Ian Shepherdson, chief economist, Pantheon Macroeconomics

"We think policymakers should put more weight on the improving wage data - which suggest that they are worrying too much about the low unemployment rate - and the clear downshift in core inflation, but Chair Powell repeatedly emphasized last week that the Fed thinks the labor market is too tight, and the latest payroll and unemployment data do not change that picture."

Quincy Krosby, chief global strategist, LPL Financial

"The unexpectedly strong payroll report, with the unemployment rate moving lower to 3.4%, coupled with the disappointing earnings reports from Alphabet and Apple, has market participants concerned that the Fed's path towards price stability will take longer than the futures market expected— and even longer than the Fed expected. The undeniably strong report is what markets hope for coming out of a recession, but not what you want to see when expectations for the end of the Fed rate hike campaign is suddenly challenged by significantly stronger labor market."

Bill Adams, chief economist, Comerica Bank

"The January jobs report increases the odds that the Fed’s terminal rate is over 5%. Their decision will depend on whether other economic data corroborate this jobs report over the next few months. Wage growth is still slowing in the January jobs report, but its other details will make the Fed worry more about the risk of overheating."

Mike Loewengart, head of model portfolio construction, Morgan Stanley Global Investment Office

"Payrolls blowing expectations out of the water adds more fuel to the Fed’s rate hike campaign. It’s going to get harder to argue that rate cuts may be in 2023’s future if the labor market is able to continue like this, especially considering that it remains to be seen how quickly inflation will fall, even if we have reached the peak. And the growth wasn’t focused in one sector either, with gains coming in across the board highlighting the resiliency of this labor market amid a difficult environment. Investors have had a lot to digest this week so it’s no surprise to see this report pull the market back."

Alexandra Wilson-Elizondo, head of multi-asset retail investing, Goldman Sachs Asset Management

“The report will make insurance cuts less likely as there are no material signs of stress to force a rate cut. In other words, this print gives the Fed more room to allow for stagnation in the macro economy and risk remains skewed to over-tightening causing a recession.”

U.S. Federal Reserve Chair Jerome Powell attends a press conference in Washington, D.C., the United States, on Feb. 1, 2023. The U.S. Federal Reserve on Wednesday implemented its first rate hike in the new year. The central bank hiked rates by a quarter percentage point, marking the eighth time the Fed has raised rates since it began tightening in March last year. (Photo by Liu Jie/Xinhua via Getty Images)
U.S. Federal Reserve Chair Jerome Powell attends a press conference in Washington, D.C., the United States, on Feb. 1, 2023. The U.S. Federal Reserve on Wednesday implemented its first rate hike in the new year. The central bank hiked rates by a quarter percentage point, marking the eighth time the Fed has raised rates since it began tightening in March last year. (Photo by Liu Jie/Xinhua via Getty Images)

Gregory Daco, chief economist, EY Parthenon

"This report would favor the Fed proceeding with a 25bps rate hike in March, but it doesn’t resolve the question of whether the Fed would pause its tightening cycle in March or later in the spring. Indeed, labor market strength is likely to influence policymakers toward more tightening for fear that wage pressure could remain stickier...After watching the significant easing of financial conditions in the wake of his press conference, Fed Chair Powell may have to lean toward more tightening than markets are currently pricing as the infernal Fed tango continues."

Jeffrey Roach, chief economist, LPL Financial

"The labor market is still solid, offsetting the risk of slower consumer spending. Additionally, the slowdown in average hourly earnings should ease inflationary pressures in the near term as wage growth comes back in line. No doubt the Fed will continue to increase rates at the next meeting to slow the demand side of the economy."

Steve Rick, chief economist, CUNA Mutual Group

“January’s Consumer Price Index report revealed that prices declined month-over-month for the first time since May 2020. The decline in prices indicates that the Fed’s aggressive interest rate hikes are beginning to tackle inflation but are not yet directly impacting unemployment numbers. Ideally, the economy will reach a goal of 2% inflation, 2% economic growth and a natural rate of unemployment of 4.5% by 2024.”

Dylan Croll is a reporter and researcher at Yahoo Finance. Follow him on Twitter at @CrollonPatrol.

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