U.S. Non-Farm Payrolls "Kick Off" with an Unexpectedly Strong Start; Will the Federal Reserve Delay Rate Cuts Until July?

Article by: Zhu Yu, Jintou Data

After a disappointing 2025, the U.S. labor market has shown remarkable resilience at the start of the new year. The latest non-farm payroll report exceeded expectations, not only alleviating market concerns about a rapid economic downturn but also prompting traders to reassess the Federal Reserve’s policy path. Traders are now fully pricing in a rate cut by the Fed in July, previously expecting it in June.

In January, the seasonally adjusted U.S. non-farm employment increased by 130,000 jobs, significantly above the median market expectation of 70,000, marking the largest increase since April 2025. The January unemployment rate in the U.S. was 4.3%, slightly below the expected 4.4%, reaching a new low since August 2025.

Revisions to previous months show that non-farm job gains in November were adjusted from 56,000 to 41,000; December’s gains were revised from 50,000 to 48,000. After revisions, the total new jobs for November and December are 17,000 lower than initially reported.

Following the release of the non-farm data, spot gold briefly plunged nearly $40, and U.S. Treasury bonds declined across the board. Major currencies also tumbled; the euro against the dollar fell over 60 pips, the pound against the dollar dropped more than 70 pips, while the dollar against the yen surged nearly 100 pips.

The structural improvement in the employment market is also evident. As a key indicator of potential purchasing power, average hourly earnings rose 0.4% month-over-month, outperforming expectations; average weekly hours also rebounded to 34.3 hours. Additionally, labor force participation increased slightly from 62.4% to 62.5%. Even the long-weak manufacturing sector finally turned profitable, adding 5,000 jobs in January.

Bloomberg industry research strategist noted that the dual growth in wages and hours worked is more critical than simply increasing employment numbers, as it indicates sustained consumer spending power and further increases the likelihood of a soft landing for the economy.

“Blasting” Wall Street

January’s employment growth data nearly outperformed all expectations compiled by Bloomberg, with only Citibank and Santander’s forecasts (13.5K and 13K respectively) being close to actual figures. Morgan Stanley economist Michael Gapen stated that this report is “genuine,” and the data on average hourly earnings suggests the quality of new jobs is high.

From industry breakdowns, healthcare continues to lead, adding 82,000 jobs in the month, solidifying its role as a pillar of the economy. Construction also performed well, increasing by 33,000 jobs.

Of particular note is the rebound in manufacturing. The sector added 5,000 jobs in January, the first positive growth since September 2024, completely overturning the previous pessimistic forecast of a 7,000-job decline. While whether this growth can become a long-term trend remains to be seen, it is undoubtedly a positive sign after a period of significant downturn in manufacturing.

However, not all sectors are expanding. Due to the ongoing “Government Efficiency Department” (DOGE) effect, federal employment decreased sharply by 34,000, reflecting the direct impact of fiscal austerity policies on public sector employment.

CPI May Bring “Hawkish” Surprises

Despite the strong January data and upward revisions of 17,000 jobs for November and December last year, the broader picture shows that the U.S. labor market remains fragile over the longer term.

First, annual data is not optimistic. Total employment growth for 2025 was only 181,000. Excluding the pandemic and “Great Recession” years, this is the worst annual performance since 2003, when the U.S. was recovering from the dot-com bubble burst.

Second, large-scale benchmark revisions reveal that previous data was overstated. After seasonal adjustment, historical data was revised downward by 898,000 jobs (unadjusted, 862,000). The average monthly new jobs in 2025 are only 15,000, a “dismal” level compared to previous years.

This indicates that over the past year, there was not as much new consumer income generated to drive economic spending. This revision largely explains why, despite seemingly “hot” employment data, consumer confidence indices continue to reveal anxiety about the job market.

Goldman Sachs asset management analyst Kay Haigh said that there are initial signs of tightening in the labor market, but there is still a way to go before it fully tightens. Given the economy’s continued outperformance, the FOMC’s focus will shift to inflation. “We still believe the Fed has room to cut rates twice this year; however, if the CPI released on Friday unexpectedly rises, it could tilt the Fed toward a hawkish stance.”