An unexpected downturn in the US labor market in February is fueling speculation of a potential interest rate cut this summer.
On balance, 92,000 non-farm jobs were lost, according to the government report released on Friday. Although a cold snap and strike actions contributed to the slump, experts were stunned by the surprisingly poor figures. As it turned out, 17,000 jobs had already been shed in December, followed by a gain of 126,000 (originally reported as 130,000) in January. The picture was further clouded by a surprise rise in the unemployment rate in February to 4.4 percent, up from 4.3 percent in January.
For the Federal Reserve, tasked with ensuring price stability and promoting full employment, these disappointing figures are likely a warning sign. In the futures markets, the probability of a rate cut in June was estimated at around 50 percent following the jobs report. Fed official Mary Daly stated that the latest data showed the labor market is vulnerable. However, she noted that the Fed does not base its decisions on a single month's data.
The Fed most recently held its benchmark interest rate in the range of 3.50 to 3.75 percent after three consecutive cuts. Given the outbreak of the Iran war at the end of February, oil and gasoline prices have risen, stoking new inflation concerns. However, Fed Governor Christopher Waller does not expect the increase to lead to sustained inflation or necessitate a change in rates. Yet, the development of the job market must also concern the Fed: "The US labor market is ailing," noted VP Bank Chief Economist Thomas Gitzel.
Investors appeared unsettled. The Dax and futures for the major US indices extended their losses after the publication, trading between 1.3 and 1.8 percent lower. Meanwhile, the dollar index and the yield on ten-year US Treasuries only dipped temporarily.
"NEGATIVE OUTLIER"
Commerzbank economist Christoph Balz interprets the February figures as a "negative outlier." He noted that a strike in the California healthcare sector alone reduced employment by 31,000. Furthermore, the cold snap may have dampened employment more than expected, as evidenced by the decline in construction jobs: "In any case, monthly employment gains have been fluctuating around the zero line for some time now."
Expert Dirk Chlench from Landesbank Baden-Württemberg points out that the household survey, which forms the basis for calculating the unemployment rate, also shows a decline in employment. Surprisingly, however, the sluggish labor market situation is not impacting wage development. Average hourly earnings rose for the second consecutive time at a monthly rate of 0.4 percent: "This does not make the Federal Reserve's task any easier. We expect a key interest rate cut by mid-2026," said the LBBW economist.
(Report by the Reuters office in Washington, written by Reinhard Becker, with contributions from Rene Wagner and Sanne Schimanski. Edited by Olaf Brenner.)
