To The Moon

Last Friday, the latest report showed that nonfarm payrolls increased by 517,000 in January. This figure is more than twice of the December figure and nearly triples the consensus estimate of 185,000. Meanwhile, other employment-related data were equally strong. The number of average weekly hours rose from 34.4 to 34.7; the labor force participation rate edged up and the unemployment rate fell from 3.5% to a record low of 3.4%.

As a result, US stocks - $S&P 500(.SPX)$ ,US debt - $iShares 7-10 Year Treasury Bond ETF(IEF)$ and gold- $Gold - main 2304(GCmain)$ all saw significant pullbacks after the NFP report.

Source: Bank of America

According to Bank of America, the following three reasons contributed to such strong January employment data.

1. Strong demand in the service sector. 397,000 jobs were added in January in the service sector, well above the 2022 Q4 average of 218,000; the two major service sectors- travel and health care - are still not back to pre-pandemic levels. Their demand continues to rise and drive employment data up.

2. Employment in the public education sector is recovering after the strike of the University of California ended in late December.

3. Climate impact. The overall climate is warm this year, and the willingness to work in winter employment is high. Data show that among people unwilling to work, the total number that impacted by weather in January this year was only 284,000, much lower than the average value of 307,000 in the past decade.

Source: Bank of America

However, Jan Hatzius, chief economist at Goldman Sachs, citing high-frequency data from job platforms Indeed and LinkUp, pointed out that job openings in the US job market are now on a downward trend.

Compared to the 5.5 million job openings in the latest JOLTs report, Indeed and LinkUp's data showed a gap of 4 million jobs as of the end of January, midway between the post-pandemic peak of 6 million and the pre-pandemic 2 million. At the same time, annualized year-over-year wage growth has fallen to 4.25%, down from a high of 5.5% in 2022, and is inching closer to the 2% inflation target.

Source: Goldman Sachs

Expectation of Fed pivot weakens

At the Feb. 1 FOMC meeting, the Fed raised rates by 25bps as expected and did not pour cold water on the relatively easy financial conditions so far this year. However, strong employment data came out two days later. As market gave higher weight to the latest message, institutions revised their strong expectations for Fed pivot.

Currently, a number of institutions, including JP Morgan, Goldman Sachs and Bank of America, believe that rates will be raised by 25bps in March and May, respectively, and the benchmark rate will remain at 5.00%-5.25% until the end of the year. Among them, Bank of America believes that the Fed may be more employment-oriented in deciding the end point of rate hikes, while it will be more inflation-oriented in deciding when to cut rates.

Source: Bank of America

Goldman Sachs' Jan Hatzius team believes that Powell's insistence that the Fed's mission to control inflation is not over, while also believing that a "soft landing" is possible. So Goldman Sachs is pricing the benchmark rate higher than the market.

Source: Goldman Sachs

The possibility of economic soft landing emerged?

With inflation turning down and employment remaining strong, major institutions are becoming more confident about a soft landing for US economy. Goldman Sachs' model lowers the probability of a recession in the US economy over the next year, from 35% to 25%, well below the median of 65% derived from a Wall Street Journal survey.

Goldman Sachs Jan Hatzius team pointed out that the job market and business surveys become strong, making the risk of a US recession in the short term greatly reduced. Although Europe will face greater tightening pressure than the United States, Goldman Sachs believes that the tightening financial environment will have a more lagging impact on Europe than the United States. So the European economy will not enter recession.

At the same time, Goldman Sachs believes that its latest business activity index shows that China's economic recovery has begun to accelerate, the market's expectation for China's economic growth will continue to improve. In addition to China, raw material exporters and countries that Chinese tourists like to visit will benefit. The normalization of global supply chains, along with stronger growth and higher oil prices, will influence global inflation figures.

Source: Goldman Sachs

As for the impact of economic soft landing, Goldman Sachs analysts believe that economic growth and a fall in inflation favor cyclical assets. But their upside is limited. Absolute and relative valuations of US stocks are still high at the moment. Against the backdrop of persistently high benchmark interest rates, US stocks may have more rooms to fall as corporate margins are still at high levels. From an economic perspective, a soft landing under strong employment background implies a limited economic rebound.