US job strength signals Fed may hold off on additional rate cuts

• Private payrolls jumped 172,000, far exceeding the 68,000 estimate, with gains concentrated in healthcare, social assistance, and construction
• Average hourly earnings increased 0.4% month-over-month, above the 0.3% forecast, while underemployment fell from 8.4% to 8%
• Market expectations shifted following the report, with analysts indicating the data 'likely puts to bed hopes for a third rate cut this year' and reinforces a more patient Fed approach

Summary

The US economy added 130,000 jobs in January 2026, significantly exceeding the Bloomberg consensus forecast of 65,000, while the unemployment rate declined to 4.3% from 4.4%. Private payrolls surged to 172,000, nearly triple the estimated 68,000, with growth concentrated in healthcare, social assistance, and construction. Manufacturing added 5,000 jobs, reversing decline expectations.

Additional positive indicators included labor force participation rising to 62.5%, underemployment falling to 8% from 8.4%, and average hourly earnings increasing 0.4% month-over-month, above the 0.3% forecast.

Market Implications: The stronger-than-expected report has shifted Federal Reserve rate cut expectations. Analysts now anticipate fewer cuts in 2026, with the first potential reduction delayed from June to July. The report "likely puts to bed hopes for a third rate cut this year," according to XTB's Kathleen Brooks. US Treasury yields responded positively, with the two-year yield rising over six basis points.

Key Context: Despite the positive January figures, substantial downward revisions to 2025 data revealed virtually no jobs growth last year. The three-month average payroll gain stands at 73,000, up from 17,000 in December, suggesting momentum is building entering 2026.

Analysts note the labor market is stabilizing rather than rapidly deteriorating, which will encourage Federal Reserve hawks to maintain current policy. However, Wells Fargo economists emphasized that hiring remains concentrated in specific industries, with certain demographics still experiencing elevated unemployment. LPL Financial noted employers may be extending hours for existing workers rather than expanding headcount.