The Jobs Report Revealed an Unexpected Outcome, but It’s Not What You Think

Strong Job Growth Continues in the United States

The polls of economists predicted that there would be a total of between 200,000 to 225,000 new jobs added last month. This would have been a decent number, but extremely tepid when compared to the 517,000 new jobs added to payrolls during January. Chairman Powell addressed the House and Senate earlier this week in which he attributed the strong numbers of January’s jobs report as the outcome of un-seasonally warm weather.

Today the US Labor Department showed that job growth continues to convey strong economic growth in the United States. The jobs report certainly reflected that, revealing that the total nonfarm payroll employment increased by 311,000.

Impact on Monetary Policy

Today’s jobs report was exceedingly important with profound implications for the upcoming FOMC meeting and the rate hike they will announce at the conclusion on March 22. It was widely believed by many analysts including myself that if the report showed that jobs came in strongly above expectations or forecasts it would give the Federal Reserve the necessary ammunition or data to become even more aggressive in implementing a 50-bps (1/2%) rate hike which would take the Federal Reserve’s current terminal rate from between 4 ½% – 4 ¾% to between 5% – 5 ¼%.

This more aggressive rate hike was a modification of their former policy to slow the pace of rate hikes which was evident in the fact that after four consecutive rate hikes of ¾% last year in December the Fed reduced the magnitude of each rate hike just slightly to ½% then followed its “slowing the pace philosophy” with a rate hike of ¼% in January.

However, recent reports such as last month’s jobs report coming in over 500,000 and inflation reports revealed that certain sectors continue to run hot with high inflationary pressures. The primary sector that had been troublesome to the Federal Reserve is the services industry. This changed the narrative of the Federal Reserve members.

At first, it was only the more hawkish faction including Mary Daly and James Bullard which both recommended a more aggressive stance containing a 50-bps rate hike this month. It was not long after that the more conservative faction of Federal Reserve officials moved into that camp and this report was the line in the sand that would either seal the deal of ½% rate hike or cause them to abandon it.

While market participants had braced themselves for an unexpected result with a robust jobs report which Fed officials warned would lead to a larger interest rate hike, the unexpected outcome was that it now is most likely that the Fed will only raise rates by ¼%. Truly an unexpected outcome but not because of the number of new jobs added to payroll last month but rather a change in the unemployment rate that no one had anticipated.

Forecasts were looking for a 0.1% reduction from 3.5% in January to 3.4% in February. While the economists were correct in that the net change to the unemployment numbers which came in at 0.1% however, it was an uptick rather than a downtick. The February unemployment numbers rose to 3.6% above the January unemployment numbers that came in at 3.5%.

Gold Prices Surge Following Jobs Report

This took gold futures strongly higher with the most active August contract currently fixed at $1872.70 resulting from today’s gain of $38.10 or 2.08%. Gold opened at $1835, traded to a low of $1830 and a high of $1874.30. On a technical basis, today’s close took gold prices right to the 50-day simple moving average which is currently fixed at $1872.70.

With the jobs report behind us we now have a weekend to decompress until Monday morning when we will once again focus on the next key and critical report the CPI, the Consumer Price Index for February.

Let us leave that topic for Monday have a great weekend.
Wishing you as always good trading,

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Gary S. Wagner