Markets often move in unexpected ways and Friday’s (2 February) release of blow-out non-farm payrolls data was no exception.

The US economy added 255,000 jobs per month on average in 2023 and coming into the latest data for January the consensus was looking for the rate to slow to 180,000.

The actual number of 353,000 jobs created was even higher than the top end 290,000 forecast, while the unemployment rate remained steady at 3.7%. That means the unemployment rate has stayed below 4% for two years, the longest stretch in 50 years.

Not only is the labour market showing little signs of slowing, but the rate of wage growth also surprised to the upside with a year-on-year increase of 4.5% compared with 4.1% expected.

Economists estimate wage growth of 3% to 3.5% is consistent with an overall inflation rate running close to the Fed’s 2% target.

Markets have priced in around six interest rates cuts in 2024 starting in March, although Fed chair Jay Powell served up some cold turkey at the latest FOMC meeting (31 January) by saying he didn’t expect to have enough confidence in the slowing inflation data to start cutting rates next month.

With stronger-than-expected jobs data, higher wage growth and shorter odds of a March rate cut, investors might be forgiven for anticipating a negative reaction from equities.

After initially trading lower in the pre-market, the benchmark S&P 500 ended the day higher while 10-year treasury bond yields moved higher pushing back over 4%.

Investors may have been disappointed by the declining prospects for lower interest rates, but the resilience of the economy appears to trump this disappointment.

Richard Bernstein, chief investment officer of Bernstein Advisors, believes US earnings troughed last spring and he now sees signs of a new earnings upcycle which could herald double-digit growth.

That might seem like a problem for the Federal Reserve, but if earnings growth is accompanied by higher productivity it could happen without added inflationary pressure.

Data released on 1 February showed US worker productivity has exceed 3% annualised for the last three consecutive quarters.

BlackRock’s global head of fixed income Rick Rieder told Bloomberg his base case for rate cuts has not been derailed by stronger than expected payrolls.

He believes core inflation is trending lower and the Fed will have to cut rates to reduce the real rate of interest as inflation decelerates. 

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