What Can Markets Expect from December’s US Employment Data?

US employment data significantly influences market price movements. By examining preliminary employment indicators, we can anticipate the likely outcomes of the official data release, typically on the first Friday of each month.

This Friday, the highly anticipated US employment data is scheduled for release. Market expectations point towards a substantial increase in job growth within the United States. Concurrently, wage growth is projected to rise monthly while maintaining year-over-year stability. The unemployment rate is also expected to remain unchanged.

The significance of US employment data extends beyond its role in assessing the strength of the American economy. It directly illuminates the Federal Reserve’s dual mandate: ensuring price stability and achieving maximum employment.

Fed and the Labour Market

According to the minutes of the Federal Reserve’s recent meeting, “Officials are considering potential shifts in trade and immigration policies while formulating their economic forecasts.”

In last December’s meeting, some officials expressed concerns that “trade policies implemented by the incoming administration could complicate the management of inflation in the near future.” Furthermore, Fed policymakers emphasized the need for a cautious approach in the upcoming quarter.

Based on recent data and the potential impact of policy changes under the new administration, Fed policymakers anticipate a slight deceleration in GDP growth alongside a modest increase in the unemployment rate compared to previous forecasts.

The minutes further stated, “Available information at the time of the meeting indicated that real GDP continued to exhibit robust growth in 2024. Labour market conditions have shown improvement since the beginning of last year, although the unemployment rate remains low. Consumer price inflation has moderated from year-ago levels but persists at an elevated level.”

Some members of the Federal Open Market Committee (FOMC) advocated for a 25-basis point interest rate reduction during the previous meeting. They emphasized that if forthcoming US economic data aligns with market expectations, a gradual and measured approach to interest rate adjustments would be appropriate until reaching the neutral interest rate level.

While the minutes primarily focused on broader economic conditions, Treasury Secretary Janet Yellen specifically addressed the labour market in her recent statements. She acknowledged a slight softening in labour market conditions but emphasized that they remain fundamentally sound. Secretary Yellen attributed the rise in inflation primarily to labour shortages.

Yellen further suggested that “spending related to COVID-19 mitigation efforts may have contributed to higher inflation.” Additionally, she noted that “fixed income premiums, which have experienced substantial increases, appear to be reverting to more normal levels recently.”

Secretary Yellen stressed the importance of placing fiscal policy on a sustainable trajectory. She highlighted that recent economic data suggests that interest rates may ultimately settle at a higher level than currently anticipated by market participants.

Employment Data Scenarios

Two primary scenarios emerge when considering the potential outcomes of the US employment data: a positive scenario and a negative scenario.
These scenarios are derived from an analysis of various preliminary employment indicators, providing valuable insights into the likely trajectory of the official data release.

Upbeat Scenario

A scenario of positive employment data is supported by several key indicators:

• The Challenger job cuts index in the US declined to 11.4% in December, a significant improvement from the previous reading of 26.8%.

• The JOLTS job openings index decreased to 8.184 million in June, compared to the previous reading of 8.230 million. While lower, this figure still exceeded market expectations of 8.030 million.

• The US job openings index increased to 8.098 million in December, surpassing the previous reading of 7.839 million and outperforming market expectations of 7.700 million.

• The employment component of the US manufacturing PMI, as reported by the Institute for Supply Management, rose to 48.1 in November, marking an improvement from the previous reading of 44.4.

• The University of Michigan consumer sentiment index maintained its level at 74.00 in December, avoiding a decline despite the revision.

• Initial jobless claims in the US decreased by 20,100 claims in the week ending January 3rd, falling below market expectations of 218,000 claims.

• The total number of Americans receiving unemployment benefits increased to 1.867 million, compared to the previous reading of 1.834 million. However, this increase remained below market expectations of 1.870 million.

• The four-week average of initial jobless claims decreased to 213,000 in the week ending January 3rd, reflecting a downward trend.

Downbeat Scenario

• The ADP National Employment Report indicated a modest increase of 122,000 jobs in the nonfarm private sector in December, falling short of market expectations of 140,000 jobs.

• The employment component of the US services PMI, as reported by the Institute for Supply Management, declined slightly to 51.4 in December from the previous reading of 51.5.

Given the preponderance of positive indicators, a robust increase in US employment data could reinforce the Federal Reserve’s perception of making substantial progress in its fight against inflation. This positive outcome could bolster market sentiment, favor risk assets, and potentially exert upward pressure on the US dollar.