The US November non-farm payroll report further confirms the weakening US labor market, but this is unlikely to change the Federal Reserve's policy outlook in the short term...
Data released by the U.S. Bureau of Labor Statistics on Tuesday showed that the U.S. added 64,000 jobs in November, compared with a net loss of 105,000 jobs in October. As for the unemployment rate, it climbed to 4.6% in November, the highest level since September 2021.
Following the release of this non-farm payroll data, investors initially seemed unsure how to react. Goldman Sachs... Strategist Chris Hussey noticed this during last night's trading.
Hussey points out, "Today's price action suggests that investors seem unsure how to respond to this morning's (non-farm payroll) data. On one hand, the 10-year U.S. Treasury yield fell 3 basis points as investors shifted to bonds—historically a defensive signal. But a quick glance at the S&P 500's performance on Tuesday reveals that some of the worst-performing sectors that day—healthcare, utilities..." Real estate has historically been considered a defensive sector, while the S&P 500's technology sector saw the most significant gains on Tuesday.
What exactly happened?
Hussey points out that this may simply reflect the market digesting the data, or it may reflect the heated debate about the future direction of the Federal Reserve: how many rate cuts will we see, and when?
In fact, judging from the interpretations of the data released by investment banks on Tuesday, industry insiders have expressed a wide range of opinions.
However , the prevailing view is that this non-farm payroll data, somewhat "distorted" due to the longest government shutdown in history, has limited overall reference value and may not determine the Federal Reserve's next decision. Furthermore, the data does not reflect the current state of the US labor market, which is not yet at a point where a rate cut is inevitable.
Krishna Guha, Global Head of Policy at Evercore ISI, said, “We don’t think the data is weak enough to prompt the Fed to cut rates again in the near term. A rate cut would only be triggered if the data significantly missed expectations. While the Fed will not be complacent and will be closely watching the December data, we don’t think the October-November data has met the criteria for a rate cut.”
Capital Economics economist Stephen Brown also said he doubted the report was "enough to make the Federal Open Market Committee (FOMC) consider restarting rate cuts at future meetings."
Typically, this data could trigger renewed concerns among Federal Reserve officials about the health of the job market, prompting them to cut interest rates further. However, economists and Fed watchers point out that caution should be exercised when interpreting these figures, given that the government shutdown lasted throughout October and extended into November, potentially distorting the data.
The U.S. Department of Labor had previously warned that the data had a higher standard error than usual due to multiple factors, including a decline in survey response rates, adjustments to overall weighting, and the use of a two-month analysis period instead of a one-month period.
Furthermore, while the unemployment rate jumped to 4.6%—a typically worrying sign—the rise may be driven by government job cuts. As expected, October saw a surge in federal job losses as federal employees who opted to resign earlier this year were finally removed from the payroll on October 1st. Delayed resignations resulted in a loss of 162,000 government jobs in October, followed by another 6,000 in November. Since peaking in January, federal government jobs have cumulatively decreased by 271,000.
When asked about the rising unemployment rate, White House National Economic Council Director Kevin Hassett pointed out that the labor force participation rate also rose in November. "The coexistence of these two phenomena likely indicates that the 250,000 federal employees who accepted buyout packages are still looking for work in the labor market," he said.
Of course, not all Wall Street institutions shared the view that the data would support the Fed holding off on taking any action.
RSM Chief Economist Joe Brusuelas said, "The non-farm payroll data likely reinforced the stance of those advocating for rate cuts at the December meeting. Late in the economic cycle, the Bureau of Labor Statistics tends to overestimate employment data, subsequently lowering its initial forecasts in baseline revisions. If this holds true, the door to rate cuts will be open in the near term, especially given the weak January employment data."
Morgan Stanley Ellen Zentner, chief economic strategist at Wealth Management, also believes that this data is a "golden opportunity" for those expecting further interest rate cuts. She pointed out, "There is indeed weakness in the labor market, but there are no signs that the overall economy has derailed."
Federal Reserve Chairman Jerome Powell warned at a press conference following last week's policy meeting that the Fed needed to carefully assess employment data. "There are technical issues with how some of the data for inflation and the labor market are collected, which could lead to data distortion—not only greater volatility, but also distortions," he said. "We must examine this data with caution."
Powell pointed out at the time that he believed monthly job growth was likely overestimated by an average of 60,000, and that actual job growth was closer to a monthly decrease of 20,000.
According to the CME Group's FedWatch Tool, following Tuesday's non-farm payroll data release, traders currently expect a 25% probability of a Fed rate cut in January and a 75% probability of holding rates steady, largely unchanged from the previous day.
(Article source: CLS)
