The Fed is not in its pre-rate decision blackout, meaning that the market has to focus on the data to figure out what will happen at the last rate decision of the year. Friday’s November US NFP is one of the two major data points that will be pivotal for the Fed’s decision. Given what happened last month, markets might be primed for a stronger reaction to the data this time around.
In his last public appearance before the next FOMC meeting, Fed Chair Jerome Powell made the case of taking a “cautious” approach to rate cutting. He argued that the economy was doing well, and that implies a solid labor market. The perception is that the Fed moved to cutting rates in September due to the weakness seen in the Q2 and Q3 jobs numbers. With inflation near the target, the jobs market had become more of a worry for the Fed.
Reshifting the Focus
The last reading of the Fed’s preferred inflation indicator – core PCE price index – showed a modest tick upwards in October. If that is then followed by an unexpectedly strong labor report for November, it could be that the Fed decides to forego the final rate cut of the year. Markets see around a 75% chance of a quarter-point cut. After that, markets expect the Fed to take a much more shallow approach, easing at a slower rate. That would help prop up the dollar, but keep gold and other commodities as well as their respective currencies under pressure.
But, it should be noted that October was an exceptional month. There were large strikes, two major hurricanes, and it was just before an election which could have kept employers on hold until the uncertainty was resolved. Those issues have been clarified since then, meaning that there could be a surge in hiring as a result of the pent-up demand. That provides a little distortion in the figures that could cause the market to jostle a bit when the data comes out.
What to Look Out For
The consensus among analysts is that headline November US NFP (Non Farm Payrolls) will come in at 214K jobs added. That would otherwise be a return to a “normal”, solid growth level. But, if we consider the 12K added in October, and then average it out, it comes out to just 113K per month. That would be below the average for the last six months, the period in which job growth has slowed to the point that the Fed decided to intervene.
In order for the jobs data to shake up markets, it would have to not only be above expectations, but supersede expectations enough to overcome the drag from October. In other words, a result above the 300K level could give markets the impression that the summer lull is over, and growth is back. That could push the chance of a rate cut back below the 50-50 mark, giving the dollar a boost. This is not expected, however.
The Other Key Indicators
The issue is whether the Fed needs to worry about inflation, or a slowing jobs market. If the unemployment rate and the earnings number show the jobs market is strong, the Fed will care more about prices and be inclined to hold rates unchanged. The Fed would be more likely to care more about the labor market if it were to show a shift towards weakness, and that would make the case for a rate cut in December stronger. The dollar would likely weaken in that scenario, giving gold a boost, but commodities could underperform over worries of lack of demand from a slowing economy.
The unemployment rate is expected to remain unchanged at 4.1%, while the average hourly earnings figure is also forecast to be the same at 4.0%. If these figures are in line, then the typically more volatile NFP headline figure might have less of an impact on the markets.
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