Dec Nonfarm Payroll Preview: Markets, Data to Show If Fed Pivot Justified

"We do not expect to see a sharp contraction in employment just yet, but remain cautious as we head into 2024," Jefferies' economics team led by Thomas Simons wrote in a research note on last Friday. "With the UAW strike finally in the rearview, we expect the volatility in manufacturing payrolls we saw over the last couple of months to level out."

While the pace of hiring is moderating, a resilient labor market supports views that the economy will continue to expand in 2024, albeit at a slower rate. That’s consistent with the Federal Reserve’s latest economic projections. Fed officials also see inflation cooling.

“Job gains have been concentrated in just two acyclical sectors - health care and government - with flat to negative growth in most industries. As a result, wage growth will moderate in December. Though a Fed pivot may have stunted recessionary dynamics in the labor market, that dynamic isn’t clear enough yet, and our base case remains a persistent increase in the jobless rate in 2024.” According to Bloomberg economics.

Source: Bloomberg

In U.S. economic updates on Wednesday, job openings slid to a 32-month low of 8.8 million in November from a revised 8.9 million in the prior month, the U.S. Bureau of Labor Statistics said in its JOLTS report. That's seen as another sign that a prolonged hiring boom is fading in response to higher interest rates.

The number of initial jobless claims for the week ending December 30th will be released this Thursday, with analysts projecting a figure of215,000, roughly in line with the previous value.

The initial jobless claims rose by 12,000 to 218,000 in the week ended December 23. Despite the increase, first-time applications for unemployment benefits remain near historical lows, adding to evidence that companies are reluctant to pare headcounts against a backdrop of steady demand.

Source: Trading Economics

Meanwhile, continuing jobless claims rose through mid-December, suggesting a slower pace of hiring and longer spells of unemployment.

Markets are entering the new year betting that the Fed cuts interest rates in March. As of last Friday, investors put a 87% chance on a rate cut by the end of the March meeting, according to CME FedWatch Tool.

"Resilient labor markets with a soft downward trend also point to a later start to cuts than what markets are expecting," Zentner wrote in a research note on Dec. 19.

Zentner believes monthly payroll additions would have to sink below 50,000 by February's report, coinciding with consistent low inflation readings, for the Fed to cut in March. And even still, the job slowdown would have to be a trend not one low reading.

"Nonfarm payrolls are noisy, so we do not think one weak print will suffice for a rate cut," Zentner said of jobs reports. Morgan Stanley's base case remains the first Fed cut will come in May.

Nomura continue to expect the FOMC to begin a pre-emptive easing cycle with a 25bp rate cut in June.

Source: Bloomberg, Nomura, Yahoo Finance