The health of the US jobs market is crucial to gauging whether the consensus call from the last few months of a soft landing can continue in 2024. That puts Friday's December monthly non-farm payrolls report firmly under the spotlight.
In recent months, economic growth has eased and inflation cooled, fuelling the massive risk rally and allowing the Fed to pencil in more rate cuts for 2024. That also means focus will move inevitably to the FOMC’s other part of their mandate - employment. At the same time, the economy has shown little evidence that months of tighter monetary policy are causing a strong downturn.
Any signs of deviation from that scenario, in the form of exceedingly strong jobs growth or a sudden drop in employment, could shake investors’ confidence in a soft landing and the Goldilocks scenario. Consensus expect a headline print of 168,000 jobs in December versus 199,000 in November, unemployment is forecast to tick up modestly to 3.8% while average hourly earnings are likely to remain fairly steady at 0.3% m/m and 3.9% y/y.
Markets are pricing in around 150bp of rate cuts in 2024 for the Fed so six 25bps rate cuts. Over the last month, the 10-year US Treasury yield dropped some 40bp to 3.85%, a very sharp decline in fixed income terms. Is there too much optimism inflation will continue to trend lower without the US slipping into recession? Certainly, it is a stark reversal from the fears of “higher for longer” borrowing costs that ultimately triggered the global bond sell-off in the autumn. Indeed, markets have pared some of their rate cut bets already in the first couple of trading sessions this year.
However, given investors’ strong conviction that the Fed will soon start slashing rates, a small beat or miss in the headline print is unlikely to generate much more than a kneejerk reaction in the markets. The risk of a bigger reaction probably lies in an unexpectedly hot report. The dollar might jump higher along with Treasury yields, while Wall Street could succumb to selling from investors scaling back their rate cut bets. That would be a “good news is bad news” type market reaction.
Other data this week includes jobs openings and ISM employment figures which will inform the labour market going forward. This evening’s FOMC minutes will also be watched as they come from the “pivot” meeting in December. Key will be how diverse are the range of views, which are reflected in the wide dot range and how broad is support against premature easing.
Here are the numbers to know for Friday's NFP:
