- The US gained 223K jobs in December, below the "whisper" expectations
- A cooling labor market implies a nearing end to the tightening cycle.
- Wages are sliding and implies the stickiest inflation is falling – and the Fed is watching.
Overpromise, underdeliver – that explains the decline of the US Dollar in response to the Nonfarm Payrolls. While the labor report showed an increase of 223K jobs – above what the calendar showed –, it is below what investors had expected following robust leading indicators. ADP's figures and an upbeat employment component in the ISM Manufacturing PMI raise real expectations to roughly 250K.
That explains the initial response, but there are deeper reasons to expect further falls. First, the trend in labor market growth is too the downside – December's 223K iks lower than 256K according to the revised data for December. It extends a trend of moderation.
Secondly, wage growth decelerated to 4.6% YoY, significantly below estimates. That is a huge sigh of relief for the Federal Reserve. The world's most powerful central bank went to lengths to explain that labor-related inflation is what it is focusing on. Why?
First, non-core inflation such as energy and food prices are out of the Fed's control and are set in global markets. Price rises related to goods are falling thanks to the unsnarling of supply chains – the transitory inflation the Fed was talking about a long time ago.
Another type of inflation is set to come down – housing, which is down due to the Fed's rate hikes, but the full effect will only be seen in 2023. What's left is called "non-shelter core services inflation" – things like getting help from an account, a haircut or anything involving people giving services. These all cost more – but this jobs report provides some optimism.
I will go with a bold call – this jobs report opens the door to the Fed ending its tightening cycle in March. Officials will decide on a 25 or 50 bps hike in February according to the inflation report coming out on January 12, and will then do something similar in the following meeting.
Afterward, it is hard to see further increases to borrowing costs with a cooling jobs market. This is the beginning of the end of the Great Tightening of 2022, which spills into 2023 – but not much.
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