Economic Equilibrium

Economic Equilibrium

The year started with markets convinced that the Fed would start cutting its key interest rates as soon as March, giving a probability of 97.5% to such an outcome on January 1st. However, following solid macroeconomic data throughout the month and a less dovish Fed, markets were far less sure at the end of the month, with this probability down to 35% on January 31st. It is true that the December Services ISM disappointed sharply, falling from 52.7 to 50.6, its weakest in 7 months, with a large decline in the employment component from 50.7 to 43.3, lowest since 2020. Manufacturing picked up to 47.4 but remains in contraction for the 14th month with soft demand. However, the job market is still very tight, with persistently low initial jobless claims, a sustained pace of jobs’ creation (353k in Jan.), a low unemployment rate (3.7%) and wage growth rising (4.5% y/y in Jan.)

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