The first week in the month is always a crucial one for economic data and the market is finding plenty to like so far. Job growth is still happening, but at a slower pace, activity in the mighty U.S. services sector is expanding, but modestly. The oil price is down, taking more heat out of the inflation picture, but not so much that the world’s major producers have expressed alarm about the demand outlook.
The past few weeks have witnessed a dramatic shift in expectations for Federal Reserve monetary policy, from a “higher for longer” scenario to one of “lower, more quickly”. Futures are pricing in a whopping 130 basis points of cuts in 2024, which many in the market say is far too optimistic, given the resilience of the economy, the evidence of tightness in the labour market and the fact that inflation is still above the central bank’s 2% target.
Federal Reserve Chair Jerome Powell answers a question during a press conference at the Federal Reserve in Washington, U.S., November 1, 2023. REUTERS/Kevin Lamarque
The 1980s were a period of higher interest-rate volatility. But in the past 30 years, the quickest the Fed has flipped to cutting rates has been the seven months between February 1995 and July that year, when they fell 25 bps to 5.75% in response to GDP virtually halving to 1.3% in the second quarter.
The U.S. economy grew at a clip of 5.2% in the third quarter, well above expectations, which, in theory, would argue against a drop in rates any time soon. But recent data suggests momentum since then may have waned, as higher borrowing costs erode hiring and spending.
It’s been four months since the Fed last raised rates. Money markets show the earliest opportunity for a cut is priced in for March – eight months from the last rate hike – with a cut fully priced in by May, 10 months from the July hike.
The strength of the U.S. consumer has taken most observers, including Fed policymakers, by surprise this year. Employment is holding up, wage growth means households’ purchasing power hasn’t suffered in the face of high inflation and higher interest rates in the last year.
A lot is riding on Friday’s jobs report. Job growth has to be decent, but not so decent as to suggest rate cuts might not be necessary as quickly as some believe. It’s also got to show some sort of softening, but not enough to herald a sharper slowdown in the economy.
Today’s ADP survey of private sector employment is expected to show a rise of 130,000 workers in November, while non-farm payrolls is forecast to show growth of 180,000. The economy has generated around 2.4 million jobs so far this year, compared with 4.26 million at this point in 2022.
The pace is slowing, but so is the breadth of job creation, according to Deutsche Bank. The bank’s economists estimate that the end of the autoworkers strike will give a 30,000 boost to the headline payrolls number.
But beyond that, they are looking at the report’s diffusion index, which they say shows 70% of the private job gains in the past year have come from just two sectors, leisure and hospitality and private education and healthcare. They say that outside of those areas, job creation in the last 12 months has run at just 0.7% and over the last six months, a mere 0.2%.
Key developments that should provide more direction to U.S. markets later on Wednesday:
November ADP national employment survey
October international trade
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