While analysts might not have celebrated this week's uninspiring employment figures, they certainly didn't let it diminish their optimism. The financial district is anticipating a holiday surprise in the form of a final interest rate reduction by The Federal Reserve, lowering the benchmark rate from 3.5 to 3.75%, and recent employment statistics might have just secured this outcome.
Throughout the year's closing month, investor outlooks regarding a potential reduction have experienced significant fluctuations. According to CME's FedWatch indicator, the probability of a rate cut, which stood at merely 50% a few weeks prior, has now climbed to just shy of 90%.
The Federal Reserve and the financial markets appear to be in a similar predicament: Experts are uncertain whether the Fed will lower interest rates, as the Fed itself likely lacks clarity. Officials on the Federal Open Market Committee (FOMC) are grappling with opposing forces impacting their objectives: Inflation stands at 3%, consistently exceeding their 2% goal, and has now firmly entered the “sticky” classification.
TL;DR
- Analysts remain optimistic despite uninspiring employment figures, anticipating a Federal Reserve interest rate reduction.
- Probability of a Federal Reserve rate cut has significantly increased to nearly 90% according to CME's FedWatch indicator.
- Job cuts are at pandemic-level severity, with Challenger, Gray & Christmas reporting over 1.1 million cuts by November.
- Markets expect a December Fed cut, viewing labor market weakness as positive news for lower capital costs.
Conversely, the employment sector is precariously balanced. The jobless rate has remained fairly consistent near 4%, attributed to a diminishing workforce, influenced by Trump's immigration directives and a surge of individuals entering retirement. Nevertheless, available positions are rapidly declining, indicating that a modest increase in dismissals might have a more significant impact than typically observed.
Yesterday’s ADP jobs report didn’t help. The private data showed a surprise drop of 32,000 roles in November, with the report adding that pay growth has also been on a downward trend. “Hiring has been choppy of late as employers weather cautious consumers and an uncertain macroeconomic environment,” ADP’s chief economist, Dr Nela Richardson wrote in the report. “And while November’s slowdown was broad-based, it was led by a pullback among small businesses.”
Upon examining the figures, businesses employing one to 19 individuals eliminated 46,000 positions, whereas firms with 20 to 49 staff members reduced their workforce by 74,000. In contrast, organizations boasting 500 or more employees increased their headcount by 39,000.
Compounding the negative outlook was the most recent jobs report by Challenger, Gray & Christmas, indicating that by November, companies had declared 1,170,821 job cuts—a 54% rise compared to the 761,358 declared during the initial eleven months of the preceding year. If these numbers seem recognizable, it's due to their pandemic-level severity, as the career specialists noted. “Year-to-date job cuts are at the highest level since 2020 when 2,227,725 cuts were announced through November,” “It is the sixth time since 1993 that job cuts through November have surpassed 1.1 million.”
Bad news is good news
Financial markets might not be celebrating the idea of job cuts, but they'd likely embrace a less robust economic forecast if it signals that a reduction in interest rates will usher in an era of more affordable capital.
“The market shifted expectations after guidance from NY Fed President Williams that he supported a rate ‘further adjustment in the near term’,” wrote Bank of America economists Aditya Bhave, Mark Cabana, and Alex Cohen in a note to clients this morning. “The Fed has not pushed back and history suggests the Fed does not surprise hawkish. A December cut seems a forgone conclusion.”
“Data on the U.S. Labor market continues to reinforce the case for easing, while inflation data shouldn’t stand in the way,” echoed Mark Haefele, UBS Global Wealth Management’s CIO. “Inflationary pressures appear to be moderating, as the ISM Prices Paid Index fell to 65.4 in November, down from 70 in October, marking a seven-month low. Finally, although inflation is running around 1pp above the Fed’s 2% target, the personal consumption expenditure index—the Fed’s favorite measure— should show on Friday that price pressures are not intensifying.”
“Signs of weakness in the incoming lower-tier U.S. Labor market data have been consistent with the market coalescing around a December Fed cut,” chimed Goldman Sachs in a note to clients this morning.
But the FOMC meeting next week won’t be plain sailing. In BofA’s opinion, Powell will preside over “the most divided committee in recent memory.” Trump-appointee Stephen Miran, for example, will likely once again advocate for a 50 basis point cut—in line with the reductions the White House has been lobbying for all year. A number of members are also expected to push for a hold, while the remaining majority will opt for a more minor 25bps revision.
“Turning to Powell’s press conference, we think he will attempt to strike a hawkish tone to placate the hawks,” BofA added. “We are skeptical this would work. Powell’s hawkish remarks in July and October jolted markets, but they didn’t stop the Fed from cutting. Investors might be wary of getting head-faked for a third time.”
