US Jobs Report Takes Center Stage As Fed Goes Quiet

A raft of top-tier US economic data due this week will help traders refine Fed policy expectations and could be pivotal for the dot plot refresh later this month.

I suppose this goes without saying, but it’d take an unimaginably strong jobs report (followed by a wild upside CPI surprise on December 12) to put a rate hike on the table at 2023’s last FOMC meeting.

The Committee’s made up its mind not to hike again unless the data forces its hand, and although November payrolls probably got a boost from UAW laborers going back to work, the NFP headline is still expected to print below 200,000, leaving intact the gradual moderation informing sundry soft landing narratives.

Consensus is 180,000. That’d be a re-acceleration from October’s pace as initially reported. Revisions will be watched closely.

Recall that October payrolls were a dove’s dream come true. The headline was relatively soft and revisions took some of the heat out of the prior months’ prints. Average hourly earnings growth was below estimates and the unemployment rate ticked up, but remained below 4%.

The household survey will garner some attention this week. It showed the largest decline since the April 2020 jobs apocalypse in the October report.

Context is important. Traders have fully priced the first Fed cut across the March and May meetings, and the March gathering is currently a coin toss according to market-implied odds. For all of 2024, nearly five 25bps cuts are priced. That’s an asymmetric setup. The jobs report would have to be a complete debacle to get the March meeting fully priced or for traders to start wagering on a January cut. By contrast, there are any number of permutations that might see traders rethink current rate cut pricing.

“Traditionally, one would assume that having established the terminal policy rate for the cycle, any evidence the employment market was weakening would simply bring forward rate cuts [but] we struggle to envision an NFP print that would be disappointing enough to move [market-implied] probabilities significantly higher,” BMO’s Ian Lyngen and Ben Jeffery said. “Even a <100,000 jobs gain and another 0.1ppt increase in the unemployment rate would still be consistent with the Fed’s efforts to balance the labor market rather than suggest the Fed has overdone it — at least not yet.”

All of that said, I do think this week’s data, as well as the November CPI report, could decide where the dots fall in the new SEP. Remember: Assuming the Fed doesn’t hike at this month’s meeting, the 2024 dot will need to shift lower unless the Committee wants to telegraph just a single cut for all of next year against market pricing for between four and five reductions.

The JOLTS report matters too. Job openings have steadfastly refused to cooperate so far, where that means the headline remains very elevated. Quits have receded but were little changed for a third month in the last update.

The sell-side conjured any number of ways to measure normalization in job openings post-pandemic. But the simplest measure (the ratio shown above) is stuck at around 1.5 jobs for every person counted as officially unemployed. It’s an imperfect metric and, like all macro metrics, it might even be meaningless, particularly given low response rates. But the Fed watches it.

Consensus is looking for 9.33 million from the JOLTS headline this week. That’d represent a marginal decline from the prior month’s headline as initially reported.

Also on deck in the US: ISM services (est: 52.5), ADP private payrolls (est: +120,000) and the preliminary read on University of Michigan sentiment for December (est: 62). The update on services sector activity is important, particularly after last week’s manufacturing miss, and traders will also watch for any evidence that consumers’ longer run inflation expectations are at risk of rising further in the Michigan poll. The Fed’s in their pre-meeting communications quiet period.

Elsewhere, there’s a BoC meeting and an RBA decision this week. The latter could be at least somewhat interesting in the context of last month’s hike.


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