The US economy added 353,000 jobs in January which was well above analysts’ consensus estimate of a 185,000 increase. The positive news for the labor market continued as the November and December reports were also revised higher by a cumulative amount of 126,000. Average hourly earnings also surprised to the upside, coming in at 0.6% monthly and 4.6% annually vs expectations of 0.3% and 4.1%, respectively.

In response, stocks rallied, while bonds declined. The yield on the 10-year Treasury jumped 15 basis points with the curve slightly inverting as short-term Treasuries saw steeper losses. This isn’t too surprising as the strong labor market reduces concerns that the Fed is risking a recession by not cutting soon enough. Additionally, the central bank also pays close attention to wages as a major input into its inflation forecast.

Thus for fixed income, the report was negative in two ways. It implies that ‘higher for longer’ remains the status quo in terms of monetary policy especially as this was also the major takeaway from the recent FOMC meeting. The Fed’s stance would change if there was a sudden deterioration in economic conditions, or if inflation continues to move lower. The report makes it clear that neither scenario is close to fruition which means that this period of data-dependency and ‘higher for longer’ will continue.  

Finsum: The January jobs report blew past expectations in terms of jobs added and wages. In response, bonds dropped as the results reduce the odds of the Fed cutting rates at upcoming meetings.