Today's US employment report comes in hotter than expected on the surface

It is probably fair to say that today’s US employment report came in hotter than expected, with both the payrolls and monthly average earnings figures printing above expectations while the unemployment rate unexpectedly fell. In sum, there are no signs emerging yet that the labour market is rolling over under the weight of the monetary tightening the Fed has delivered to date, and nor are there any signs that such a rollover appears imminent. The report will assuage any growing concerns regarding the possibility of the US economy dipping into recession and will instead keep the ‘soft landing’ narrative very much in play. In this vein, the growing consensus in the market we had been seeing regarding the possibility of the Fed delivering an interest rate cut as soon as next March will be scaled back on the back of today’s numbers, leaving the May meeting now as the favoured month for the first cut.

For the Fed itself, today’s report probably does not amount to too much. Providing that next week’s CPI numbers continue to show the downwards trend in inflationary pressures is continuing then the FOMC will likely look through today’s figures as simply one month’s set of numbers; it will take a run of stronger reports before concerns about the ability of the labour market to stoke inflation starts to become a concern again. And there are valid reasons too for suggesting that today’s headline numbers do not tell the full story. The payrolls numbers were boosted by the ending of the UAW and Hollywood strikes that were seen in October, which together were worth around 50k jobs, while 49k jobs were attributable to the public sector. And in the private payrolls number itself, around 75% of the reported job openings have been in the education and health sectors, where jobs growth is driven much more by demographics than the state of the underlying economy. And add to this is the fact that so far this year, monthly payrolls reports have been subsequently revised down by an average of 51k.

Today’s report is therefore unlikely to change the outcome of next week’s FOMC meeting. Strongly growing immigration is expected to ensure growing slack is seen in the labour market going forward, pushing down on wages growth in the process, and consistent with the quits rate mean reverting back to its pre-covid level. And this is the key consideration for the Fed as it is wages growth that is the key driver of core services inflation ex-housing, the Fed’s current preferred measure of inflationary pressures, which is now moving lower but still remains too high. So nothing today to persuade the Fed that it needs to raise interest rates again, but plenty to allow the FOMC to maintain the narrative that another interest rate rise remains on the table, to be used if needed, and to push back against any growing expectations that monetary policy will be eased any time soon.