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March 13, 2023

Chart of the Week: US jobs report offers hope of Goldilocks scenario

by Fathom Consulting.

Friday’s US jobs report appeared to bolster the case for a 50-basis point hike in the fed funds rates when monetary policy setters deliberate their next move later this month. The FOMC slowed the pace of policy tightening at its last meeting; but Jerome Powell, chairman of the Fed, recently admitted that faster tightening may again be needed after a string of upside surprises to inflation readings and January’s blockbuster jobs report, which showed that 517,000 new jobs were added. On the face of it Friday’s report dispelled the notion that the January jobs report was an aberration, adding a further 311,000 new payrolls for February, and revising the January figure downward only marginally to 504,000. But while the jobs market remains hot, wage data have shown signs of easing inflationary pressures: average hourly earnings increased by just 0.2% month on month, or 3.6% on a three-month annualised basis. The three-month annualised change in February was the lowest in nearly two years. On balance, investors saw this as something of a Goldilocks scenario: not too hot, given the wage data, but not too cold, given the strong job gains. Yields on Treasuries fell sharply through the day, driven not just by the jobs report but by a belief that the Fed would exercise greater caution following the collapse of Silicon Valley Bank. Fathom’s Global Outlook, Spring 2023, finalised last week, attaches a 40% weight to a scenario we call ‘Immaculate disinflation’, where contrary to almost all historical precedent, policymakers are able to cool the US economy without tipping the country into recession. Developments towards the end of last week were viewed, perhaps rightly, as consistent with that scenario, reducing the need for a return to aggressive tightening.

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