This week, markets were marked by a cautious stance as traders awaited critical U.S. nonfarm payrolls and unemployment data, seeking greater clarity on the Federal Reserve's policy path—just like Fed policymakers themselves.
Before entering the blackout period ahead of its final policy meeting of the year on December 17—18, nearly all Fed officials who spoke publicly exhibited a noticeably cautious stance. On Thursday, Fed Chair Jerome Powell highlighted robust economic conditions and suggested they might proceed cautiously as they work to identify the neutral rate.
Although a handful of Fed officials refrained from making explicit comments about the decision at the December meeting, they reiterated that there was no urgency to cut rates. Meanwhile, St. Louis Fed President Alberto Musalem stood out by suggesting that pausing rate cuts—including this month---might be appropriate. However, Fed officials emphasized that they would wait for critical data to shape their decisions ahead of the meeting.
Today, the U.S. Bureau of Labor Statistics released the much-anticipated data. Nonfarm payroll employment increased by 227,000 in November, surpassing economists' median forecast of 218,000 rise. Additionally, the household survey showed that the U.S. unemployment rate remained largely unchanged at 4.2%.
Employment grew in sectors such as healthcare, leisure and hospitality, government, and social assistance, while retail trade experienced job losses. Notably, the return of workers who had been on strike in transportation equipment manufacturing contributed 32,000 jobs to the employment gains.
Before November, payrolls had grown by an average of 186,000 per month over the previous 12 months. With the gains in November, the three-month moving average of payroll increases rose to 172,000, up from 123,000.
In addition, the average hourly earnings for all employees on nonfarm payrolls increased by 0.4% in November compared to the previous month, exceeding the 0.3% forecast. On an annual basis, earnings grew by 4%, surpassing the 3.9% expectation. The three-month average of earning growth climbed to an annual rate of 4.4%.
Meanwhile, one of the key questions surrounding the data was the revisions, especially after a series of consecutive adjustments in recent months raised concerns about the reliability of the figures. September payroll gains were revised upward by 32,000, increasing from 223,000 to 255,000. October figures also saw an upward revision of 24,000, bringing the total to 36,000. As a result, employment in September and October was 56,000 higher than previously reported.
Ultimately, the data is not strong enough to compel the Fed to hold rates steady in December. Initial market reactions to the report appeared driven by the rise in the unemployment rate to 4.2%.
However, the increase in unemployment is not far from economists' forecasts and can be considered a "soft" uptick due to rounding effects. Even so, it gives the Fed some room to cut rates by a quarter point at this month's meeting. Swap market data suggests that market participants agree, with the probability of a rate cut—priced at 70% before the data—rising to 89%.
On the flip side, when considering the higher-than-expected increase in November payrolls and the solid upward revisions in the figures for the last two months, the annual average job gains remain robust. Besides, considering the year-over-year earning growth, the path to achieving the 2% inflation target may still be a long one. This is not a reason for the Fed to abandon its policy-easing trajectory, but it does provide a meaningful signal that they might need to slow down.
After the release of the data, bets that the Fed will hold borrowing costs steady at its January meeting increased, with traders now expecting a two-thirds chance of a pause. As these expectations continue to be priced in, we are likely to see a stronger dollar in the coming period.
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