How will Jerome Powell comment on Friday's Non Farm Payrolls?

Yesterday there was no data from the US economy. Markets still live with a big surprise in the form of a strong report NFP. Recall that the US labor market is doing much better than previously thought. Employment rose by 517 in January, and earlier readings were also revised upwards.

Despite the easing of the wage pressure, the labor market is likely to remain out of balance from the Fed's perspective. Therefore, interest rate hikes are likely to continue. The dollar has been on a three-day appreciation streak. Thus, the USD index chart presents an interesting technical arrangement.

The data surprised the market

In January The increase in jobs in the US amounted to 517. and was much higher than expected (185). Revisions to previous months increased employment by another 813. At the same time, the unemployment rate surprisingly fell from 3,5 percent to 3,4 percent. up to 1969 percent This is the lowest level since XNUMX.

Rarely has a single employment report changed the picture as much as the data from the previous weekend. The US labor market is in much better shape than previously reported. This is not only due to the strong job creation in January, but also past increases are much higher than reported earlier after the annual revision. At the same time, some of the signs of weakness that were evident last month have also faded. Then the employment of temporary workers, who are usually the first to be laid off in a downturn, fell for five months in a row. Now there are only two months of discounts left, and January saw an increase of 26. In addition, the previously worrying decline in the average working week reversed.

The labor market has tightened even more, as indicated by the unemployment rate. Only wage pressure indicates the direction of easing. Average hourly earnings rose just 0,3 percent. compared to the previous month, and the year-on-year index fell from 4,9 percent. to 4,4 percent, confirming the trend.

What will Jerome Powell say?

Until now, the Fed hoped that the situation on the labor market would deteriorate, which will bring inflationary pressures under control. So far this is not happening. The imbalance has further increased in recent months. The created jobs significantly exceed the level of approx. 70. vacancies needed each month to absorb new people entering the labor market. At the moment, there are two jobs for every unemployed person.

Friday's data confirmed the Fed's belief that further hikes should be continued. In reaction to the publication, the US currency strengthened significantly. On the dollar index chart, the rebound took place in a very characteristic place. The falls, which lasted over 4 months, ended around the level of 100,7 points. The size of these discounts is noteworthy. They are very similar to the "down" movement in the period from the end of March 2020 to the turn of 2020 and 2021.

The market valuation of the future interest rate path in the US has also changed. Futures contracts point to the end of the cycle at around 5,1 percent. and assume smaller cuts in the cost of money in the second half of 2023 and at the beginning of 2024.

Already there are hawkish comments from the Fed. Raphael Bostic of Atlanta acknowledged that the Federal Reserve may have to raise rates higher than previously expected. The U.S. central bank will certainly have to take a closer look at Friday's NFP reading and determine whether the employment data was some kind of anomaly. Today, Powell will speak (interview with David Rubenstein of The Economic Club of Washington) and investors will be looking for any clues or comments on a strong report.

Source: Łukasz Zembik, OANDA TMS Brokers