Mixed labour market report stands in way of further Fed rate cuts
|- The Doge effect fades from government hiring.
- January rate cut hopes shelved.
- Low hire, low fire economy.
- A productivity boom is on the horizon.
The US labour market report for December was both dovish and hawkish. The headline payrolls data was weaker than expected, jobs growth was a mere 50k, with downward revisions for November and October. However, the unemployment rate fell to 4.4% from 4.6%, and wage growth was a solid 3.8%, up from 3.6% in November.
The Doge effect fades from government hiring
The job losses were led by the private sector, as government jobs increased by 13k, suggesting that the DOGE effect is starting to wane. Overall, financial markets seem to be focusing on the drop in the unemployment rate, US Treasury yields are higher across the curve and the 2-year yield, which is the most interest rate sensitive section of the yield curve, is higher by 2.1 bps.
January rate cut hopes shelved
There has also been a reduction in rate cut expectations for the first 6 months of the year. There is now only a 5% chance of a Fed rate cut on 28th January, down from an 11% chance of a cut before the NFP reading. Overall, the market still expects 2 cuts this year, but the drop in the unemployment rate and the pick-up in wage growth could cause the hawks to take back some control at the Fed after three rate cuts at the back end of 2025.
The dollar strengthened into this report along with global stock indices. In the aftermath, the dollar has whipsawed and is slightly lower, but stocks remain strong and US futures point to a higher open later today.
Low hire, low fire economy
The weak payrolls report combined with a lower unemployment rate suggests that the narrative has not shifted for the US labour market. The US is still a low hire and low fire environment. This does not shift the dial for the Fed, aside from confirming that a rate cut in January is highly unlikely.
However, we think that it is worth watching Fed officials closely in the next couple of weeks as the payrolls figure was undoubtedly weak. The two-month net revision for payrolls was – 76k, and only 5 sectors increased jobs last month, with the bulk of jobs coming from the education and health services sector and the leisure and hospitality sector. Trade and transport shed the most jobs, which could be an early sign that the labour market is weakening, since transport is a key lead indicator for the jobs market.
A productivity boom is on the horizon
The weakening of the labour market combined with strong GDP growth is a sign that US productivity is surging. This could be down to AI, robotics, freight efficiency and inventory programmes etc., which suggests that the AI revolution is upon us, which is causing a hiring freeze, without damaging the US economy. Stronger productivity and stagnant jobs growth could be good news for the tech sector, which may lead a rally in US stocks as we end the week.
Overall, we think that the market reaction is mild so far, as this payrolls report has something for everyone.
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