[Outlook-in-Five] All Eyes on This Week’s US Payrolls Report

This week, all eyes will be on America’s payrolls report for February due on Friday. January’s jobs report was also very strong, as data showed the US unemployment rate fell to a 53-year low of 3.4%. America’s labour market thus remains very tight, fuelling wage growth and keeping inflation much higher than the Federal Reserve’s 2% target. This makes February’s payrolls data on Friday crucial. If February’s payrolls are strong like January’s, then the employment data would signal inflation is likely to remain too high for the Fed still. If the Fed was forced to re-accelerate its pace of interest rate increases, it would have a major adverse effect on all financial markets globally. Tune in to our latest podcast with Mansoor Mohi-uddin, Chief Economist at Bank of Singapore, to find out more. __________________________________________________________ [Transcript] This week, all eyes will be on America’s payrolls report for February due on Friday. In January, the monthly employment data showed the US economy had added 517,000 new jobs. This was far above forecasts for payrolls to rise by 188,000 and December’s gains of 260,000. January’s jobs report was also very strong as the data showed the US unemployment rate fell to a 53-year low of 3.4%.The labour force participation rate ticked up to 62.4% and the average work week rose significantly by 0.3 hours to 34.7 hours. America’s labour market thus remains very tight, fuelling wage growth and keeping inflation much higher than the Federal Reserve’s 2% target. Other US data releases for January also showed America’s economy remains too strong for inflation to return to the Fed’s 2% goal. Consumer price index CPI inflation only dipped from 6.5% to 6.4%. Producer price inflation was also stronger than expected. And retail sales jumped by 3% alone in January. In short, January’s US data showed the Fed’s aggressive interest rate hikes last year still have not curbed inflationary pressures decisively. We therefore, last month, revised our forecast for the central bank’s outlook. We now expect the Fed to make three further 25bps rate hikes in March, May and June. We thus anticipate the fed funds interest rate reaching a peak now of 5.25-5.50% compared to its current range of 4.50-4.75%. Financial markets have woken up to the risks of the Fed staying hawkish in the first half of 2023. The S&P 500 has trimmed its strong start to year and is now up 5% year to date, having gained as much as 10% earlier this year. Similarly, 10Y Treasury yields have jumped from 3.30% to around 4.00% now over the last few weeks. This makes February’s payrolls data on Friday key now. We think last month’s jobs gains will slow to 200,000, letting the Fed stick to 25bps rate hikes to reduce inflation to its 2% target. This will help Treasury yields stop rising and, with the US set for recession later this year, we keep our forecast for 10Y yields to end 2023 lower at 3.50%. But if February’s payrolls are strong like January’s, then the employment data would signal inflationary is likely to remain too high for the Fed still. In that case, pressure would grow for the central bank to hike by 50bps at its next meeting on March 21-22, rather than by the 25bps rise that we anticipate. If the Fed was forced to re-accelerate its pace of interest rate increases, it would have a major adverse effect on all financial markets globally. Equities, Treasuries, corporate bonds, commodities and emerging markets would all likely suffer. That’s why all eyes this week will be on Friday’s payrolls report.