News & analysis

The US economy added 199k jobs in November, up from 150k in October and marginally above consensus expectations of 183k.

While headline employment beat expectations, the rate of job growth wasn’t necessarily inconsistent with the market’s underlying view of the economy, as it still represents a slowdown in the pace of hiring from this year’s 235k average but enough strength to reject the idea of a more recessionary outlook. Instead it was the supplementary details of today’s payrolls report that led markets to trim expectations of Fed easing next year, an outcome we warned of in our preview.

Out of the major sub-indices, the drop in the unemployment rate from 3.9% to 3.7% likely provided the biggest jolt in markets, especially as it coincided with a marginal uptick in the participation rate to 62.8%.

Signs that the US labour market remained tight were also confirmed in average hourly earnings data, which shot up from 0.2% to 0.4% MoM. While a pinch of salt must be taken with these volatile series, they still provided a sobering reminder to markets that were pricing over five rate cuts from the Fed next year that the path back to 2% inflation is unlikely to be without any hiccups. This outcome presents an early Christmas present for policymakers at the Federal Reserve, who in our view were likely to push back on market pricing of their easing cycle next year through their updated SEPs at next week’s meeting.

Now, with the unemployment rate falling back and wage growth accelerating, the more cautious message from the US central bank will now be viewed as more credible by markets.

While cynics may point to the fact that employment growth was propelled once again by healthcare (+77k) and government (+49k), suggesting that the readthrough from today’s payrolls figure to the pace of underlying growth isn’t as strong, we note that November’s employment increases were significantly more broad-based than in October. Specifically, employment in manufacturing almost reversed October’s decline, while services employment was much more dispersed across industries. The sole area of weakness came in retail trade, where 38k jobs were cut. While this suggests further evidence that the US consumer is losing steam, we think it is too early to extrapolate that signal, especially as real wage growth remains firm.

Turning to the household survey, while questions can be asked about its accuracy, it’s notable that signs of tightness were visible across all indicators and were corroborated by data out of the more reliable establishment survey. Not only did the unemployment rate fall 0.2pp to 3.7%, but the employment-population ratio increased by 0.3pp to 60.5% and those reported working part-time for economic reasons fell by 295k to 4m. This corresponded with an uptick in the average workweek in the establishment survey to 34.4 hours and a rebound in average hourly earnings, from 0.2% to 0.4%.

Today’s payrolls data is consistent with our view that tightness in the labour market will prompt a reacceleration in the US economy in the first quarter of 2024, as factors weighing on household disposable incomes begin to moderate as real wages continue to recover.

As a result, we expect the Fed to remain cautious throughout the first quarter, before opting to ease policy in May. While we would note that the Fed is not setting policy directly on the strength of the labour market under current economic conditions, but instead inflation, we expect central bankers to express concerns around the lingering risk of inflation persistence from the labour market to withstand pressure, potentially even from incoming inflation data, to ease policy rates as early as Q1. The reaction in markets to today’s jobs report is consistent with our base case. Pricing of a Fed rate cut in March has fallen from 65% to just shy of  evens, while 13bps of rate cuts have been priced out across the entirety of 2024. In FX markets, the hawkish reaction in US rates has seen the broad dollar return to its weekly high after its strength was dented by speculation yesterday that the BoJ would soon adjust policy. Heading into next week’s bumper data week, we remain dollar bulls, noting that the Fed has firmer grounds to strike a more cautious tone than its peers.

Markets price out just over half a rate cut from the Fed in 2024 following today’s jobs data



Simon Harvey, Head of FX Analysis


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