US November payrolls growth hurts case for early ’24 Fed cuts

NEW YORK (Reuters) – U.S. job growth accelerated in November and the unemployment rate dropped to 3.7% even as more people entered the labor force, pointing to underlying strength in the labor market.

Nonfarm payrolls increased by 199,000 jobs last month, the Labor Department’s Bureau of Labor Statistics (BLS) said on Friday. Economists polled by Reuters had forecast 180,000 jobs created. About 25,300 members of the United Auto Workers (UAW) union ended their work stoppages against Detroit’s “Big Three” car makers on Oct. 31, the BLS strike report showed, while 16,000 members of the SAG-AFTRA actors union returned to work.

The employment report suggested that financial market expectations that the Federal Reserve could pivot to cutting rates as soon as the first quarter of 2024 were premature.

MARKET REACTION:

STOCKS: U.S. stock futures added to a slight loss then steadied to stand 0.14% easierBONDS: U.S. Treasury 10-year yield rose to 4.241% after the report. Two-year yields rose to 4.708%

FOREX: The was up 0.376%, up a bit more than just before the data

COMMENTS:

MATTHEW MISKIN, CO-CHIEF INVESTMENT STRATEGIST, JOHN HANCOCK INVESTMENT MANAGEMENT, BOSTON

    “It’s a relatively strong report. The unemployment rate is ticking down a little bit. The headline number is solid near 200,000. You saw a return from the strike on the manufacturing side which helped to put manufacturing jobs back into positive territory. There was a bit more wage growth and I think that’s causing the 10-year Treasury yields to rise, which equity markets aren’t going to be too happy about.”

   “I don’t think this gives the Fed the ability to pivot. It’s not weak enough … Powell’s going to push back on the market’s pricing of rate cuts. He’s likely to communicate that the Fed’s got to stay steady in restrictive territory for the time being.”

STUART COLE, HEAD MACRO ECONOMIST, EQUITI CAPITAL, LONDON

    “Today’s employment report has come in hotter than expected, with the payrolls number and monthly average earnings figure printing above expectations and the unemployment rate unexpectedly falling.  The picture being painted as far as the Fed is concerned will likely be one of a labour market that remains strong and showing no real signs yet of buckling under the weight of the interest rates rises that it has so far delivered.”

    “The drop in the unemployment rate in particular will assuage any concerns of a recession, and with payrolls and earnings both rising it keeps the ‘soft landing’ narrative very much in the ascendancy.”

    “The report will likely see some of those forecasting an early Fed cut next year re-evaluating their positions, and unless we get a surprisingly large fall in the CPI numbers next week, those Q1 rate cut expectations will probably now be priced out.”

    “However, this is only one month’s numbers, and as such is not likely to impact the outcome of next week’s FOMC meeting, and particularly so if the CPI numbers next week continue to trend lower. As such, the Fed is unlikely to be unduly concerned about the strength of the labour market being reported today – we would need a run of similar reports before concerns would be expressed.”

TONY ROTH, CHIEF INVESTMENT OFFICER AT WILMINGTON TRUST, PHILADELPHIA

    “These numbers today are inflationary and it doesn’t mean that from a fundamental standpoint that this isn’t totally consistent with the soft landing because I believe that it is. But from a short term technical market standpoint, this is going to weigh on both stocks and bonds.”

    “There’s been increasing pressure around the Fed to pivot to a more accommodative message, and these numbers are going to give the Fed cover to continue that very hawkish approach.”

ALEX COFFEY, SENIOR TRADING STRATEGIST, TD AMERITRADE, CHICAGO

“There was a pretty big move in the bond market to the downside, sending yields higher, so that’s why we’ve seen the reaction that we have in the equity market. But I wouldn’t be surprised if intraday we saw that kind of work its way towards unchanged or even higher, just because there was just so much fear post that JOLTS number earlier in the week and the disappointing ADP, that this was going to be a weaker number.”

“This complicates the recent market narrative of Fed rate cuts as early as March, and you do see some of that repricing. It did move down a little bit and I don’t think that’s a surprise, as for us to actually get a rate cut in March, you’re going to need to start seeing data that confirms a worsening situation. Hard to leave this report feeling that way.”

JAMIE COX, MANAGING PARTNER, HARRIS FINANCIAL GROUP, RICHMOND, VA

“It’s a good report. The Fed has to be happy with this report because the labor market is remaining strong even as inflation is coming down. There’s been a lot of questions about the Fed’s ability to bring down inflation by keep rates higher for longer without affecting the labor market. With this report, they might even cut rates. There might be an initial major reaction in markets. But I think the calculus of not having to raise rates further is more important than not having to cut them.”

BRYCE DOTY, SENIOR PORTFOLIO MANAGER, SIT INVEST, MINNEAPOLIS

    “Continued robust jobs data will continue to bring inflation down as open positions get filled. However, the knee jerk reaction is for higher yields out of fear that the Fed may do an about face hint about raising rates again. More labor supply reduces the cost of labor which is keeping wage growth at a tame 4%. Given a 2% growth rate in productivity, companies only need to raise prices 2% to cover increased wages.”

    “Solid job increases combined with wages growing faster than CPI also helps the soft landing scenario.”

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

    “This is a fairly good report, a strong report, not overly strong but strong enough to perhaps deflate the talk of a early rate cut.”

    “I don’t think this report changes the fact that the Fed is going to say on hold in December. They’re done raising rates, but it certainly is a pushback in terms of the bond markets’ expectations of an early rate cut in end of the first quarter next year.”

THOMAS HAYES, CHAIRMAN, GREAT HILL CAPITAL LLC, NEW YORK

“If you look at average hourly earnings year on year up 4% was in line with expectations, that’s okay.”

    “The headline number of unemployment going down to 3.7% it just keeps the Fed on higher alert that maybe things are running a little bit on the warm side and certainly it pushes out any type of cuts, the question will be whether it keeps any hikes on the table.”

   “Average hourly earnings is largely going to be skewed by the UAW strike and resolution to the upside, meaning these people went back to work and they went back to work at much higher wages with signing bonuses.”

   “So that may have skewed some of the data that the market is probably overreacting to a little bit this morning, but it’s worth keeping an eye on.”

   “The nonfarm payrolls number (is) not really a problem coming in excessively hot.”

BRIAN JACOBSEN, CHIEF ECONOMIST, ANNEX WEALTH MANAGEMENT, MENOMONEE FALLS, WISCONSIN“Good news is good news for the economy, but it’s bad news for what it might mean for the Fed. It was a slightly warmer than expected labor market report, but it isn’t exactly too hot to handle. The biggest surprise was probably in the wage gains, but with auto workers coming back onto payrolls it really shouldn’t be too surprising that we saw a big pop in average hourly earnings. The labor market isn’t too hot so much as it is thawing-out from the COVID freeze. Wages aren’t stoking the flames of inflation, so the Fed should just ignore this and focus on inflation.”

STEPHEN MIRAN, CO-FOUNDER, AMBERWAVE PARTNERS, NEW YORK

“Taken at face value, today’s report is basically indicating that the slowdown in the labor market is slow and gradual and not falling off a cliff. So, there’s some reassurance in that, which of course, the market is taking as indicating less likelihood or less need for the Fed to pivot aggressively to the dovish side after this.”

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