Interest rate cut thesis in the US in March loses strength after higher-than-expected payroll

Interest rate cut thesis in the US in March loses strength after higher-than-expected payroll
Interest rate cut thesis in the US in March loses strength after higher-than-expected payroll
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The confirmation that the United States labor market remains strong at the beginning of the year greatly reduced the belief that still persisted in part of the market that the Federal Reserve (Fed, the US Central Bank) could begin a cycle of interest cuts in its March meeting.

The payroll, the payroll report that shows the creation of jobs outside the agricultural sector, pointed to 353 thousand new jobs in January, well above the average projections, which pointed to 180 thousand jobs. Furthermore, data for November and December were revised upwards, adding 126 thousand new vacancies to the statistics.

Morgan Stanley comments in a report that the broad acceleration, which showed greater strength in professional and business services, retail and healthcare, increased the quarterly average from 227 thousand to 289 thousand in the comparison between December and January.

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Furthermore, wages also showed a reacceleration, driven by employment in services, and labor force participation remained practically unchanged. “In short, a strong job market that shows few signs of slowing down. Today’s data reaffirms our view that the Fed will be on hold until June, when cuts are expected to begin,” the investment bank says in its report.

The bank also comments that the employment report is further proof that the job market remains tight and, therefore, the focus continues on inflation. And that all measures monitored by Morgan Stanley should show core inflation well above 2% in the first quarter of 2024.

Claudia Rodrigues, economist at C6 Bank, agrees that the heated job market, persistent underlying inflation and the recent communication from Fed President Jerome Powell (who cited the need to gather more evidence that inflation was converging towards the target for begin to ease monetary policy), corroborate his view that the interest rate cut cycle in the USA should only begin in the third quarter of this year.

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“However, we recognize that there are chances of a cut in the second quarter if core inflation, measured by the PCE, surprises in the next releases and comes in below expectations”, he ponders.

The reasoning is similar to that of Gustavo Cruz, chief strategist at RB Investimento. “It was a very strong payroll, with an also strong revision of December data and which takes a lot of strength from the argument that there is a chance of interest cuts in March”, he comments.

He cites data from the CME platform that tracks interest rate projections, which dropped to a probability of just 21% of cuts in March after the release of the payroll.

In addition to the very strong main data, the economist highlights that, when opening the indicator, it is possible to see that job creation was strong in the 16 to 19 age group, something that only happened recently when there was a shortage of labor.

Regarding salary growth, of 4.5%, he remembers that this level is far from the 3% that Powell said he would like to see to understand that there is no pressure on inflation. “In my view, it completely eliminates the chance of a drop in interest rates in March. And with a flea in their ear if they can’t wait until June.”

The article is in Portuguese

Tags: Interest rate cut thesis March loses strength higherthanexpected payroll

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