The recent data releases suggest that the all-important NFP tomorrow will show the labor market continues to cool. This would likely affirm the growing consensus that the Fed is soon to shift to rate cutting mode. But, as expectations consolidate on a softer number, the impact of a potential surprise increases.

The Fed is waiting for the last two key bits of data ahead of its meeting next week. NFP is the first, and CPI figures next Tuesday will cement views on what to expect from the FOMC meeting. Up until now, the Fed has been heavily hinting that there will be one final rate hike before reaching the peak.

Setting Up the Expectations

But both economists and traders disagree with that view. Economists believe that rate cuts will start in the middle of next year, with no more than 100bps of easing. The market, on the other hand, is being much more aggressive. Futures prices show an expectation of the first rate cut after the first quarter, with as much as 150bps of cuts by the end of next year.

The expectation is that the Fed will acknowledge that there won’t be any more rate hikes after next week’s meeting. Only a tiny minority of the market expects the very out-side chance that the Fed might go through with the final hike. If labor data is much higher than anticipated – something that has happened a couple of times recently – then there could be a shift in expectations. The dollar could substantially strengthen, at least until the CPI data comes out.

What the Market is Looking For

The market is looking for a relatively modest 160K jobs added last month. That compares to a “normal” range of 180-200K in non-pandemic years, and to 150K last month, which was seen as a disappointment. Numbers in that range or below are likely to be seen as a sign that the jobs market is cooling.

The other metrics for the labor sector are expected to be pretty much the same as last month’s relatively soft figures. The unemployment rate is expected to remain steady at 3.9%. And the average hourly earnings are expected to see a 0.2% growth rate, just like last month. This latter figure is important for the Fed’s worry that rising wages could keep inflation higher.

What It Would Take for a Surprise

It’s easier for there to be a surprise on the upside, because the recent data has been indicative of a slowing jobs market. October JOLTS showed that the number of open jobs fell precipitously, and was well below expectations. Not only that, the prior month’s figure was revised lower, showing that there were over 900K fewer jobs than previously thought.

ADP was also below expectations, though it has lost its predictive ability with regards to NFP. But over the last several weeks the number of unemployment claims has climbed to post-pandemic highs, another indicator of weakness in hiring. All that combined to suggest markets will be really surprised if NFP is substantially above 200K.

A miss in the data, however, is likely to be in line with the general expectation of a cooling economy that would lead to the Fed to star easing. That would likely reduce the impact on the markets.

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