News & analysis

December’s nonfarm payrolls delivered a beat to expectations, coming in hotter-than-expected and posing a significant challenge to markets that had spent much of the holiday period accelerating Fed easing bets.

Overall payrolls rose by 216k, above a consensus estimate of 175k and an increase on November’s downwardly revised 173k print. Signs that the US labour market continues to hold up were not just limited to the level of employment, however, with average hourly earnings also growing 0.4% MoM and the unemployment rate holding flat at 3.7% after it unexpectedly fell in November.

While on the surface the December’s jobs report confirmed market scepticism over the Fed’s easing cycle this year, the details of the report actually provided a conflicting argument.

Looking through the details of the release, December’s payrolls increase of 216k was just below the average monthly gain of 225k for 2023 as a whole. Whilst this is some way down on the almost 400k per month average seen in 2022, it remains above the roughly 100k per month rate that we think is consistent with sustainable 2% inflation. Job gains were concentrated in government (+52k), healthcare (+38k) and social assistance (+21k), whilst losses in transportation and warehouse roles accounted for a decline of 23k. Notably, despite the current environment of elevated rates, sectors that are sensitive to discretionary spending also posted solid monthly gains on the whole. In particular, employment in leisure and hospitality rose by 40k and retail trade by 17k, though in the latter case 13k job losses were recorded for department stores specifically. Admittedly, many will likely chalk this increased employment across rates sensitive sectors as temporary hiring to support increased demand across the holiday period.

Nonetheless, that employment in these sectors continues to expand will likely worry Fed officials concerned with inflationary stickiness driven by consumer spending, and for good reason if these job additions fail to reverse in the January payrolls figures. Signs of labour market robustness were not just limited to the headline nonfarm payrolls reading.

Whilst average hourly earnings printed flat to one decimal place, unrounded wages actually increased from 0.353% to 0.44%, growth of almost 0.1pp. This underpinned the surprise uptick in the yearly figure, which having been expected to ease from 4.0% to 3.9% instead climbed to 4.1%. With wages needing to grow at 0.2-0.3% MoM to be consistent with a 2% inflation target, this once again suggests that underlying inflation pressures remain too strong for any imminent easing from the Fed. Similarly, having been expected to rise in this latest round of data, the unemployment rate remained at 3.7% flat on November’s reading and below any sensible estimates for the neutral unemployment rate.

That said, there were a handful of areas that suggest the labour market and inflation pressures may be softening below the surface. First, while the headline payrolls reading overshot expectations by 41k, it was accompanied by a downwards revision of -71k for the two months prior.

This not only suggests overall employment is now below consensus, but also highlights the risk of overinterpreting strong flash figures.

Second, whilst earnings did increase unexpectedly, this came alongside private sector hours worked edging down by 0.1 hours per week in December and a significant decline in the participation rate, suggesting more limited upwards aggregate demand pressure than indicated by headline wage growth alone.

After initially taking the dollar higher on the headline print, markets subsequently reversed those gains as the details of the report became apparent. In our view this looks a little like wishful thinking. Whilst there are some signs of softening present in the data and the December job additions may prove to be purely seasonal, the aggregate picture at present is still one of a labour market too hot for the Fed to seriously consider imminent policy easing.

A 60% chance that the Fed cuts rate in March as swap markets imply looks far too aggressive to us. Instead, we expect that today’s data will reinforce the more conservative message from regional Fed members in recent weeks, with the FOMC unlikely to cut rates until June in our view.

The devil is in the detail: USD whipsaws as markets digest the entirety of the jobs report



Nick Rees, FX Market Analyst


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