Healthy US December payrolls puts March Fed pivot in doubt

NEW YORK (Reuters) – U.S. employers hired more workers than expected in December while raising wages at a solid clip, casting some doubt on financial market expectations that the Federal Reserve would start cutting interest rates in March.

Nonfarm payrolls increased by 216,000 jobs last month, the Labor Department said in its closely watched employment report on Friday. Data for November was revised lower to show payrolls rising 173,000 instead of 199,000.

The unemployment rate was unchanged at 3.7%.

MARKET REACTION:

STOCKS: U.S. stock futures initially deepened a loss then steadied and were last off 0.11%

BONDS: U.S. Treasury 10-year yield rose to 4.063% after the report. Two-year yields rose to 4.435% FOREX: The rallied at first then pared to about where it started with a 0.24% gain

FUTURES: contracts that settle to the Fed’s policy rate indicated traders see only about a 50% chance of a rate reduction in March, versus the nearly 65% chance seen before the stronger-than-expected jobs data.

COMMENTS:

QUINCY KROSBY, CHIEF GLOBAL STRATEGIST FOR LPL FINANCIAL, CHARLOTTE, NC (emailed note)

“Despite two months of downward revisions in the payroll numbers, this report suggests that with the unemployment rate remaining at 3.7% and hourly wages continuing to surprise to the upside, the economic backdrop is solid and provides a strong cushion for continued consumer spending. The probability of an interest rate cut at the March 20 Fed meeting, which had been over 80% just a couple of weeks ago, has dropped precipitously to below 60% following this morning’s  payroll print.”

TIM GHRISKEY,  SENIOR PORTFOLIO STRATEGIST, INGALLS & SNYDER, NEW YORK

“It’s a very favorable jobs report. Non-farm private payrolls, the core measure of employment, was well above expectations, and there was a downward revision to the prior period, but it’s still a very strong number for the month of December.

    “It shows that despite higher interest rates, the economy continues to percolate along, and it’s a very favorable environment for businesses… It should help the jobs picture more when the Fed does reduce rates.

    “We’ve had a bit of a correction here (in stocks), which is not totally unexpected given how strong the markets were in 2023 and even going into the end of the year.  There’s some straight-forward profit-taking in the first week of the new year, and I wouldn’t expect this to last long.”   

JAMIE COX, MANAGING PARTNER FOR HARRIS FINANCIAL GROUP, RICHMOND, VIRGINIA

“Give me a solid labor market with disinflation all day long–a strong, employed consumer trumps all.  If your recession call is predicated on job losses, this report isn’t for you.”

ADAM BUTTON, CHIEF CURRENCY ANALYST, FOREXLIVE, TORONTO

    “It’s obviously a strong report… The market’s sniffed out a strong jobs report over the past couple of days, so maybe the reaction isn’t as strong as it could have been. In terms of the data itself, the revisions take a bit of the shine off the headline number….It is more of a mixed bag than it looks at first blush.”

“Overall, I think the market is a bit ahead of itself here, but you look out at pricing, we’ve taken March (rate cut expectations) down to maybe 55% from 68%, and that sounds about right. I call March about a 50/50 meeting, and I wonder if we don’t stick around there for a little while as the data rolls in.”

“Inflation numbers will look really good by about June, but asking for that in March is aggressive. If the numbers start to turn I think the Fed isn’t going to hesitate, I think they’ve indicated that now, but this one jobs report – is this a game changer or not? I don’t think it’s a game changer.”

“The headline came in a little rich, unemployment a little low, wages a little hot, but when you dig a little bit deeper in the numbers, it’s not as one sided as it first appears, especially the participation and the revisions.”

LINDSAY ROSNER, HEAD OF FIXED INCOME MULTI SECTOR INVESTING, GOLDMAN SACHS ASSET MANAGEMENT, NEW YORK

“With a mild winter (so far) and jobs numbers typically bolstered by seasonal hiring, we anticipated a strong and better-than-consensus number and here it is. This number does question the confidence of the market around the March cut. We’ve got three inflation prints between now and the March meeting. Every number counts.”

ANDREW PATTERSON, SENIOR INTERNATIONAL ECONOMIST, VANGUARD

“Today’s report speaks to the bumpy road ahead for the Fed’s journey back to 2% inflation.  Strong headline job growth and wage growth above 4% combined with Fed communications, including the minutes, emphasizing the need to remain higher for longer decrease the likelihood of preemptive rate cuts.  The decision of when to first cut policy rates remains one for the second half of the year in our view.”

SAMEER SAMANA, SENIOR GLOBAL MARKET STRATEGIST AT WELLS FARGO INVESTMENT INSTITUTE, CHARLOTTE, NORTH CAROLINA

    “The part that probably has markets worried the most is that unemployment fell and wages accelerated. Those two things by themselves are pretty troubling. In order to bring inflation down we need those numbers to cool off faster. That’s where much of the market reaction will center, on those two numbers.”

    “The tricky part isn’t so much what the Fed anticipated, which was three cuts for next year. It’s what the markets had priced in, which is closer to six or seven.”

    “Even the Fed’s got to be thinking that if we’re going to do three cuts it can’t be in the first part of the year … this number doesn’t suggest the Fed should be in any hurry to cut rates any time soon. The wage number was the most troublesome because it suggests inflation may not go away quietly.”

    “Coming on the heels of a hotter-than-anticipated November payrolls report, which included faster-than-expected wage growth, this may be the start of a worrisome trend.”

BRIAN JACOBSEN, CHIEF ECONOMIST, ANNEX WEALTH MANAGEMENT, MENOMONEE FALLS, WISCONSIN“It’s the season for returning gifts and the market is doing the same thing. The rally after St. Powell delivered gifts is being taken back. There is a lot of superficial strength in this labor market report. The December numbers were stronger than expected, but there were some significant back month revisions. The gains are mostly in the acyclical sectors like government and health care. The more cyclical sectors are struggling to tread water. The stronger than expected wage gains is probably the most important feature of this report. When combined with a reduction in the aggregate weekly hours worked, the total payroll cost increases were relatively small. Goods-producing industries only had payroll costs increase 0.2%. It was the service-providing information sector that had a big 3.0% gain, but that was because their hours rose 2.2%.”

MICHAEL JAMES, MANAGING DIRECTOR OF EQUITY TRADING, WEDBUSH SECURITIES, LOS ANGELES“The jobs number was a little hotter than bulls were hoping to see. That’s why you’re seeing yields ticking higher and that’s going to likely be a further headwind for equities in general.”

“(Rate cut bets) are only going to get further scaled back, given this jobs report.”

PETER CARDILLO, CHIEF MARKET ECONOMIST, SPARTAN CAPITAL SECURITIES, NEW YORK

“The topline payrolls number was higher than expectations, but real problem is wage growth coming in hotter than expected.”

“The drop in participation could explain why the unemployment rate was unchanged.”

“There might be some seasonal factors attached to this, but nevertheless it’s a game changer in the debate of over the Fed, in the sense that the hope of them lowering rates in the first quarter is likely to fade and the market may now begin to price (rate cuts) at a later date.”

“What does it mean for the economy? Well, there’s a bit of an acceleration here, so that points to the possibility of a soft landing.”

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