Strong Job Growth in January

MACRO FRAME

Markets continue to balance resilient growth signals against moderating inflation, with the latest jobs report reinforcing the view of a stable labor market rather than a deteriorating one. Equity volatility remains concentrated in technology shares amid ongoing debate over AI-driven disruption, while broader risk sentiment has yet to materially weaken. With labor data now absorbed, attention turns more squarely to upcoming inflation figures and earnings results as the primary drivers of near-term rate expectations.

STOCK INDEX FUTURES

Equity indexes are higher following January’s labor report, which showed hiring continued to grow at a moderate pace. Total nonfarm payroll employment increased by 130,000 jobs, with gains concentrated in health care, social assistance, and construction, while a few sectors including federal government and financial activities saw modest declines. The unemployment rate fell to 4.3% from 4.4%.

Taken together, January’s report reinforces the view of a labor market that is cooling gradually rather than deteriorating sharply. This should keep Federal Reserve policymakers comfortable with a cautious approach — any near-term easing bets remain contingent on further signals of slowing job growth and sustained moderation in wage dynamics.

US retail sales unexpectedly stalled in December, following a 0.6% gain in November and missing expectations for a 0.4% increase. While pockets of strength were seen in building materials and gasoline, declines across discretionary categories such as clothing, furniture, and electronics offset those gains, pointing to softer consumer momentum.

Retail control sales, used in GDP calculations, slipped 0.1%, marking the first decline in three months and suggesting a modest drag on fourth-quarter consumption. The report indicates demand remains intact but is losing some pace rather than contracting outright.

Watch point: Following January’s jobs print, focus on sectoral job gains will gain greater scrutiny.

CURRENCY FUTURES

US DOLLAR: The greenback is sharply higher following January’s jobs report, which showed continued employment gains and reinforced the narrative of a stable labor market. Wage growth held at 3.7% year-over-year, slightly above expectations and unchanged from December, supporting the dollar’s bid by helping to temper expectations for near-term policy easing. With inflation data now in focus later in the week, near-term direction is likely to hinge on whether price pressures show further moderation or renewed firmness.

Traders continue to reassess the timing of potential policy easing from the Federal Reserve later this year. Fed funds futures now imply roughly a 6% probability of a 25 bps cut at the March 18 meeting, down from 25% before the jobs data, underscoring that conviction around near-term easing remains limited. Money markets are favorable to a rate cut in June or July, with July’s meeting being fully priced in.

Watch point: A hotter-than-expected core CPI reading would likely reinforce dollar support, while softer inflation data could revive easing expectations and pressure the index lower.

EURO: The euro fell against the dollar following January’s labor report. Looking ahead, the regional economic calendar is relatively light, leaving near-term direction more sensitive to incoming US data. The primary domestic release will be the second estimate of GDP due Friday, which should offer further clarity on underlying growth conditions.

Broadly, the euro continues to draw structural support from capital flows and relative equity performance despite a neutral policy backdrop. Markets appear comfortable with the ECB maintaining a patient stance, though sustained appreciation above the $1.20 level would likely prompt more dovish rhetoric from policymakers.

The European Central Bank held rates as expected and described growth as resilient but uncertain, maintaining data-dependent guidance while continuing passive balance sheet runoff. The combination signals little urgency to move on rates but preserves policy flexibility. Inflation in the eurozone eased to 1.7% year-over-year in January from 2.0% in December, while core inflation slipped to 2.2%, its lowest level since October 2021, reinforcing the view that price pressures are gradually moderating to below the 2% target.

Watch point: A break above $1.20 would materially raise expectations of verbal or policy intervention from ECB officials.

BRITISH POUND: Sterling is little changed against the dollar, with support coming from relief that Prime Minister Starmer’s position looked more secure than it did earlier in the week. Starmer pledged on Tuesday to never walk away from his job to change Britain, brushing off a challenge to his authority by the Labor leader in Scotland and other figures in the party who have called on him to quit. Still, the political situation remains a downside risk for the sterling.

Attention now turns to Thursday’s GDP release, which will be closely watched for signals on underlying growth momentum following the Bank of England’s narrow decision to hold rates steady last week. Any evidence of economic softening would likely reinforce expectations for an earlier rate cut, while firmer activity data could temper near-term easing bets.

The Bank of England’s narrower-than-expected vote to hold rates steady signaled that several policymakers are increasingly comfortable with near-term easing, reinforcing expectations that policy could shift if incoming data continue to show moderating inflation and softer labor conditions. Recent indicators, including easing wage growth and a gradual loosening in the labor market, alongside updated BoE projections that see CPI returning to target by Q3 2026 have reduced concerns over persistent price pressures, though some officials are likely to seek further confirmation that progress is sustained.

Watch point: Expectations for near-term easing are likely to build if upcoming data remain accommodative, leaving sterling vulnerable to further downside against the dollar should rate-cut timing shift toward March or April.

JAPANESE YEN: The yen continued to extend gains over the dollar overnight, following Sunday’s decisive election result for Prime Minister Takaichi’s coalition, which secured a supermajority in the Lower House and increases the likelihood of promised tax cuts and fiscal spending measures. The outcome provides greater legislative flexibility despite limited control in the upper chamber.

The yen is getting support from positive sentiment that Japanese markets could be positioned for a cyclical breakout. Stocks have outperformed bonds and expansionary fiscal policy paired with industrial policy reflects a broader push to bolster Japan’s economic growth. Still, Takaichi’s fiscal desires are likely to offer strong headwinds to any sustained strengthening in the yen.

Notably, the long end of the Japanese government bond curve has shown little adverse reaction to the election result, a dynamic that has helped underpin the currency for now. Under a stronger LDP mandate, fiscal policy is likely to tilt more expansionary, including the possibility of targeted consumption tax reductions, which could add to inflationary pressures and, in turn, bring forward expectations for further Bank of Japan rate normalization.

Watch point: A disorderly move beyond the 160 level would significantly raise intervention probabilities.

AUSTRALIAN DOLLAR: The Aussie is higher, breaking above $0.71 for the first time since February 2023 after Reserve Bank of Australia Deputy Governor Andrew Hauser reiterated that inflation remains too high and that policymakers are committed to bringing it lower. Markets currently imply roughly a 70% probability of another rate increase to 4.10% at the May meeting, with expectations reinforced by recent inflation data.

Business survey data from National Australia Bank indicated activity slowed modestly in January while cost pressures eased to their lowest level since 2021, and capacity utilization edged down from elevated levels. Despite signs of moderating momentum, markets continue to price further tightening, implying roughly a 64% probability of another rate increase in May and around 35 bps of additional hikes over the remainder of the year.

Watch point: Evidence of sustained moderation in core inflation or a clearer slowdown in household demand would likely temper tightening expectations, while continued strength in price and spending data could keep policy bias firm.

INTEREST RATE MARKET FUTURES

Treasury yields moved higher following the January employment report, with the 10-year yield rising to 4.2% after the release as the strong payroll gains and firmer wage growth tempered expectations for near-term Federal Reserve easing. While headline payroll gains pointed to continued labor market resilience, the upside surprise in average hourly earnings reinforced concerns that services inflation could prove sticky, prompting a modest repricing at the front end of the curve and spillover into longer maturities.

Participation and the employment-population ratio were little changed, and long-term unemployment remained elevated relative to a year earlier. Despite average hourly earnings posting continued modest growth, the broader pattern of slowing wage momentum seen in late 2025, could provide some relief on the inflation front longer-term.

Attention now turns to Friday’s inflation figures for further signals on the timing of Fed policy. Markets remain centered on a July rate cut, with some probability assigned to a June move. Money markets are pricing around 51 bps of total easing by year end.

January’s inflation reports have historically shown a mild upside bias, as the start of the year is a common period for price resets across goods and services. While seasonal adjustment factors are designed to account for this pattern, seasonally adjusted January readings have tended to run slightly firmer than other months, suggesting some residual seasonality may remain.

Services inflation could carry added weight in this release, as businesses in the sector often implement price increases early in the year. Additional upside risk stems from firms passing through tariff-related cost pressures, particularly where prior price adjustments were more gradual.

In Fedspeak on Tuesday:

• Cleveland Fed President Beth Hammack (voter) said the bank faces no urgency to lower rates; “we could be on hold for quite some time.”
• Dallas Fed President Lorie Logan (voter) said she was “cautiously optimistic” that the current policy setting will get inflation back to target while keeping the labor market stable. Logan said if data pans out as she hopes, there will be no need to lower rates further. Logan noted she was more worried about inflation remaining high but said she would support rate cuts if the labor market cools materially.

Watch point: With the current data pointing to a stable labor market, Friday’s inflation data will be watched for signs of where inflation is coming from, rather than a headline figure as a whole.

The spread between the two- and 10-year yields is 67.00 bps, while the two-year yield, which reflects short-term interest rate expectations, is 3.520%.

 

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