Weekly Economic Snapshot: Jobs, Inflation, & Sentiment Keep Markets on Edge

Last week’s economic data continued to reflect a mix of resilience and uncertainty. While key indicators pointed to ongoing expansion, concerns over trade policy, inflation, and consumer confidence clouded the outlook. The labor market remained solid despite signs of cooling, and business activity in both manufacturing and services held steady. Meanwhile, markets saw sharp swings as investors reacted to shifting sentiment on tariffs, earnings, and inflation risks.

The U.S. labor market cooled in January but remained strong. The latest employment report showed that 143,000 jobs were added last month, falling short of the expected 169,000 and marking a notable slowdown from December’s 307,000 gain. However, revisions to November and December’s figures revealed stronger job growth at the end of 2024 than initially reported. For the full year, just under 2 million jobs were added—an average of 166,000 per month—but annual revisions showed 589,000 fewer jobs than previously estimated.

Despite the slowdown in hiring, the unemployment rate edged down to 4.0%, remaining near historically low levels. Wage growth also surprised to the upside, with average hourly earnings rising 0.5% from the previous month—higher than the expected 0.3% increase and an acceleration from December’s 0.3% gain. On an annual basis, wages grew 4.1%, unchanged from December but above the expected 3.8%.

Overall, the latest jobs report supports the Fed’s wait-and-see approach, reinforcing its view of a stable labor market. With hiring moderating but wages still rising, the data gives the Fed room to keep rates steady while continuing to monitor inflation trends.

The December JOLTS report signaled that finding work is becoming more difficult. Job openings fell by 556,000 to 7.60 million, well below the expected 8.01 million. This marks the second-lowest level since January 2021 and the sharpest monthly decline since October 2023. While openings remain above pre-pandemic levels, they have steadily declined over the past 2.5 years and are now more than 4.5 million below their 2022 peak.

Other key figures from the report showed slight increases in both hires and quits, while layoffs edged down. The hiring rate, at 3.4%, is near its lowest level in the past decade, and quits—a gauge of worker confidence—stood at 2.0%, well below pre-pandemic norms. The ratio of job openings to unemployed workers fell to 1.10, well below pre-pandemic levels.

The JOLTS data serves as a key indicator of labor demand, and a shrinking gap between job openings and available workers suggests easing pressure on wages and inflation. While the labor market is cooling, the latest data aligns with the Fed’s assessment that the labor market is stable and healthy.

Consumer sentiment continued to weaken in February, according to the preliminary reading of the Michigan Consumer Sentiment Index. The index fell for the second consecutive month, dropping to 67.8, its lowest level since July. This represents a 4.6% decline from January’s final reading and an 11.8% drop from a year ago, coming in well below the expected 71.9.

The Michigan Consumer Sentiment Index is a monthly survey measuring consumers’ opinions with regards to the economy, personal finances, business conditions, and buying conditions. This month, both the current conditions and future expectations components declined, with respondents expressing heightened concerns about tariffs and a potential resurgence of inflation. As a result, inflation expectations jumped significantly, with short-term expectations reaching their highest level since November 2023 and long-term expectations climbing to their highest since 2008.

The Consumer Discretionary Select Sector SPDR ETF (XLY A) is tied to consumer sentiment.

The U.S. services sector continued to expand in January, marking its seventh consecutive month of growth. The ISM Services PM edged down to 52.8 from 54.0 in December, indicating slower expansion and coming in below the expected 54.2. Despite the slight decline, the majority of the index’s subcomponents improved, with employment and net export orders seeing the strongest gains. Additionally, 14 service industries reported growth while 3 contracted. Overall, business conditions in the services sector remain stable as the sector has now grown in 23 of the last 25 months, dating back to January 2023.

U.S. manufacturing activity expanded in January for the first time since 2022, according to the ISM Manufacturing PMI. The index rose to 50.9, surpassing expectations and signaling a potential turning point for the sector after 26 consecutive months of contraction, the longest streak in the index’s history. Nearly all subcomponents of the index improved, with inventories and backlog of orders being the only components in decline. Additionally, eight manufacturing industries reported growth, while the remaining eight reported contraction. While this could mark the end of the manufacturing recession, uncertainty surrounding trade policy raises questions about whether the rebound will be sustained.

ETFs associated with industrials and manufacturing include: First Trust Industrials/Producer Durables AlphaDEX Fund (FXR B+), Industrial Select Sector SPDR Fund (XLI A), Vanguard Industrials ETF (VIS A+), and iShares U.S. Industrials ETF (IYJ A-).

The S&P 500 finished last week in the red despite midweek gains, posting a 0.2% loss from the previous Friday. The index is up 2.68% year to date. Meanwhile, the S&P Equal Weight Index fell 0.6% from the previous week and is up 3.05% year to date.

The 10-year Treasury yield fell below 4.50% for the first time since mid-December this week, ultimately finishing the week at 4.49%. Meanwhile, the 2-Year note finished higher than last week at 4.29%.

According to the CME FedWatch Tool, markets currently anticipate just one rate cut in 2025 coming at the July 30th meeting, with a second coming in mid-2026.

Another week of closely watched economic updates lies ahead. The Bureau of Labor Statistics will release January’s Consumer Price Index (CPI) and Producer Price Index (PPI), both of which will be in focus as inflation remains a key concern. Additionally, the Census Bureau will report on retail sales, providing insight into consumer spending, while the Federal Reserve will release industrial production data, shedding light on manufacturing output.

For more news, information, and analysis, visit the Innovative ETFs Channel.