The United States Bureau of Labor Statistics (BLS) is set to release the Nonfarm Payrolls (NFP) data for December on Friday at 13:30 GMT. This report is important for several reasons. It gives us the best glimpse into the country’s economic employment picture and helps shape economic policy and market sentiment. While the NFP is very important, it’s just one piece of a much bigger jobs report. This report has developed many metrics, which can occasionally obscure the purpose of the NFP.
No wonder that policymakers and financial markets hang on every word of the NFP data. This new public data provides a window into how drastically jobs have been cut across all sectors. This data is made public on the first Friday after the counting month. Most notably, it’s one of the most important indicators we have for measuring the health of our nation’s economy. The monthly swings in payrolls are extremely erratic. Though they may have an effect on what the market reacts to, their effect is typically only apparent when taking into account more macroeconomic conditions.
Current Employment Trends
As recent reports have documented, private sector payrolls are in the early stages of a very weak comeback. The Automatic Data Processing (ADP) report showed a strong gain of 41,000 jobs in December, recovering from a drop of 29,000 jobs in November. Analysts are expecting the monthly job gain figure to settle in at about 50,000 over the past two months. According to TD Securities analysts, “We look for job gains to stabilize at around the 50k mark over the last two months, with private payrolls printing a 50k gain in December as the government likely shed 10k jobs over the same period.”
Payroll changes are only half the story in the jobs report. The Participation Rate and Average Weekly Hours are two other numbers that could potentially have a major affect on how the market responds. These factors take on heightened significance only during tumultuous periods, such as the “Great Resignation” or the Global Financial Crisis.
The unemployment rate is expected to fall to 4.5%, from 4.6%. At the same time, annual wage inflation, measured by average hourly earnings, may tick up to 3.6%, from 3.5%. “We expect the unemployment rate to normalize to 4.5% after seeing a shutdown-driven jump to 4.6% in November. Avg. hourly earnings likely rose 0.3% m/m and 3.6% y/y,” stated TD Securities analysts.
Rate Cut Speculations
The next employment figures will have a significant say on whether expectations coalesce around the first rate cut coming in March, as is rounded up to 45% likely now. Currently investors are pricing less than 15% chance of a 25bp rate cut this month. That last bit of intelligence is a recent boon from the CME FedWatch Tool. On a related note, earlier this week, Richmond Federal Reserve Bank President Thomas Barkin underscored the need for thoughtful calculation in rate decisions. He added that such decisions must be “finely tuned” given persistent risks like a recessionary labor market and high inflation.
Barkin recognized that despite the low unemployment, there is danger of a painful turn in the labor market. It’s a view that’s echoed throughout the market at large, which remains jittery heading into Friday’s NFP release.
“Rate decisions will need to be finely tuned,” – Thomas Barkin
“The unemployment remains low, but added that they don’t want the job market to deteriorate further.” – Thomas Barkin
Market Reactions and Future Outlook
Even as traders look toward the NFP data release, kneejerk market reactions will likely be a reflection of where the current economic sentiments lie. TD Securities analysts noted that “Currently, the consensus expects steady policy to be maintained this month.” They further discussed that if the payrolls report is weak, the damage to the U.S. dollar might already be done. At the same time, of course, they expect the dollar to continue showing safe-haven behavior this year.
Analysts expect volatile trading conditions to continue as markets react to multiple events affecting the state of the economy. Given the current uncertainty surrounding employment data and monetary policy, market participants are poised for significant fluctuations depending on how the NFP figures align with expectations.
“A soft payrolls report would undermine the USD. That said, we would expect the USD to again exhibit safe haven behavior this year meaning the potential of support for the greenback,” – TD Securities analysts