The latest U.S. nonfarm payrolls report was significantly stronger than expected, suggesting that the labor market remains extremely tight and that some investors expect the Fed’s cycle of rate hikes to end soon and move towards more supportive monetary policy through lower interest rates before the end of the year may be premature. Notably, the US economy added 517,000 new non-farm jobs in January, the biggest increase since July 2022, the unemployment rate unexpectedly fell from 3.5% to 3.4%, the lowest level in 53 year, and the growth rate of average hourly wages, although it registered a further slowdown to 4.4% year on year from 4.8% in the previous month, remained above levels of 3.0 to 3.5%, which are considered consistent with the target the Fed’s inflation rate.

Following strong data, Fed Chairman Jerome Powell reiterated in a speech at the Economic Club of Washington on Tuesday that further rate hikes and longer-term tightening are needed to bring inflation back in time relative to the medium-term target. He noted that the particularly strong employment data is consistent with the Fed’s view that inflation will not fall as quickly as markets expect. A similar and possibly more aggressive tone was adopted by several Fed officials in the days that followed, giving the impression that the bank was now leaving open the possibility of a bigger raise in the coming months. Under the influence of these “aggressive” statements, and mostly strong data on the labor market, the futures market revised upwards its estimates of the dynamics of interest rates in the US. Specifically, he now sees the end of the Fed’s rate hike cycle in the summer of 2023 with a final rate of 5.15%, up from 4.80% prior to the employment data announcement, while discounting a year-end cut of just 25 bps. , against 50 m.v. A week ago.

Given the above conditions, US Treasury markets moved lower this week, like their European counterparts, influenced by statements from ECB officials who supported the possibility that the bank will continue to raise interest rates in the second quarter of the year. In the currency markets, the dollar strengthened against the EUR/USD pair. drop below 1.07 for the first time since mid-January.

* Department of financial analysis and research of international capital markets of Eurobank.