The Facts Changed.  Not So Sure the Narrative Did

Every month, we discuss the “highly anticipated” jobs report and ponder what it might mean for markets.  There were “whisper numbers” that anticipated Nonfarm Payrolls to come in even lighter than the published consensus, and there was plenty of talk about the rising unemployment rate triggering the “Sahm Rule.”[i] Umm, no.

• November Nonfarm Payrolls were expected to increase to 185,000 from 150k in October.  They came in at 199k.  (ADP, which missed estimates and fell on Wednesday,  once again failed to be a useful indicator)
• The November Unemployment Rate was expected to be unchanged at 3.9%.  It fell to 3.7%, even as the labor force participation rate grew by 0.1% to 62.8%.
• Average Hourly Earnings were expected to rise from 0.2% to 0.3%.  They rose to 0.4%

This doesn’t seem consistent with the fixed income market’s recent moves toward pricing in more imminent rate cuts.  Bearing in mind the Federal Reserve’s dual mandate for stable prices and maximum sustainable employment:

1. An unemployment rate of 3.7% seems pretty close to maximum employment.
2. If monthly wages are rising at 0.4% per month, that doesn’t fit either the “stable prices” or “sustainable” metric of 2% inflation. 

Was there anything in today’s employment report that would induce the Fed to ease monetary policy in the near future?  Not to my eye.

We have been noting that since the aftermath of the last FOMC meeting, Fed Funds futures had been ratcheting forward their expectations for the likely start of rate cuts from June to March, and were anticipating five rate cuts in 2024 instead of three.  One might have expected some of those views to have changed – especially with a 13-basis point rise in 2-year Treasury yields.  They have, to some degree:

From yesterday:

And updated with current data:

Put in a different format, here is the change in Fed Funds Futures expectations for rates from yesterday to today:

We see that the expectations for a cut in March have fallen from 72.8% to essentially a coin flip.  We also see that the likely date for a fifth cut has been pushed out to January 2025.  These changes clearly do not price out all the additional rate cut enthusiasm that had been priced in during November and early this month, but the direction has changed today.

The University of Michigan data that arrived an hour and a half later pushed back on the bond market’s apparent hard landing viewpoint.  Put simply, it was stunning. 

• The Sentiment reading jumped from 61.3 to 69.4, well above the 62.0 consensus estimate.
• Expectations leaped to 66.4, far above last month’s 56.8 and the 57.0 consensus.
• Current conditions rose to 74.0, also above last month’s 68.3 and the 68.5 estimate.
• 1-Year Inflation Expectations plunged to 3.1%.  They were at 4.5% last month and estimated to dip to 4.3%.

The last number is particularly interesting.  Inflation expectations typically follow gasoline prices, yet they had been rising in recent months even as prices at the pump fell.  It’s as though they caught up all at once this morning:

University of Michigan 1-Year Inflation Expectations (yellow), vs. AAA Daily National Average Unleaded Gasoline Prices (green) and Rolling Front-Month Crude Oil Futures (red)

Source: Bloomberg

This may not be as much of a slam dunk for the FOMC as it may appear.  While the Fed is assiduously trying to manage inflationary expectations, if the fall in expectations is due largely to falling energy prices, that may not factor heavily into their thinking.  Remember, the Fed looks more carefully at core inflation rates, which exclude food and energy.   Oh, and those do include wages…

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[i] According to the St. Louis Fed: [The] Sahm Recession Indicator signals the start of a recession when the three-month moving average of the national unemployment rate (U3) rises by 0.50 percentage points or more relative to the minimum of the three-month averages from the previous 12 months.