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The US economy created 275,000 jobs last month, beating forecasts, but big downgrades from previous data have fueled expectations of as many as four interest rate cuts this year.
February nonfarm payrolls data beat economists’ forecasts of 200,000 new jobs and indicate the U.S. services sector remains strong.
However, February’s 275,000 job number was eclipsed by revised totals for January and December, when 167,000 fewer jobs were created than previously thought.
Bond yields fell and stocks opened higher in response to the size of Friday’s downgrades, as traders bet that a weaker labor market would allow the U.S. Federal Reserve to cut interest rates sooner.
“Downward revisions to previous months’ earnings leave recent growth less strong than previously thought,” consultancy Capital Economics said in a note.
The futures market was fully pricing in a quarter-point interest rate cut for June, shifting future expectations.
Traders briefly priced in four interest rate cuts this year soon after the release. The Fed itself plans three cuts this year.
The two-year Treasury yield, which moves with interest rate expectations, fell, leaving it down 0.05 percentage point at 4.46%.
The S&P 500 index rose about 0.5% in mid-morning trading Friday and is on track to close at a record high.
In Friday’s release, the Bureau of Labor Statistics downgraded total new jobs for January from an initial blockbuster reading of 353,000 to 229,000. The December figure was reduced from 333,000 to 290,000.
The BLS said February’s unemployment rate rose to 3.9% from 3.7% the previous month. Wage growth also slowed, with average hourly wages rising just 0.1% in February.
“February’s strong payrolls data is more than offset by downward revisions in December and January, rising unemployment and low wages,” said Stephen Stanley, U.S. economist at Santander Bank.
“However, the overall picture in my opinion is that the job market is still healthy.”
February data indicated that job growth remained concentrated in the services sector, with significant payroll increases in healthcare, hospitality and the public sector.
“The strength of the economy continues to be in the services sector and we know it [services inflation] it’s something the Fed is keeping an eye on,” said Diane Swonk, chief economist at KPMG US.
Consumer price index inflation data for February will be released on Tuesday.
Fed Chair Jay Powell said Thursday that the U.S. central bank is “not far” from having the confidence to start reducing borrowing costs as it awaits more concrete evidence that inflation is on track to reach the bank’s 2% target.
But other rate makers believe there are signs that the U.S. economy is too strong to justify lower borrowing costs.
Wei Li, chief global investment strategist at BlackRock, said the U.S. labor market remains tight, arguing that the Fed will cut rates, “but not as soon or as soon as the market expected.”
He added: “Our baseline expectation is that cuts will begin in June, with three cuts this year.”