The December Non-Farm Payrolls report, released last Friday, looks majorly disappointing at first glance. However, correct judgment of the report involves understanding the subtle interplay between individual components in the context of the current phase of the market cycle. As is the case with some past NFP reports, the individual pieces of the December data did not make up a unified picture, sparking controversy about how we had to interpret the report.
Let’s start with key takeaways:
- Payrolls: 145K, vs. 164K expected, November was revised down to 256K.
- Wage growth: just 0.1% MoM, vs. 0.3% forecast and 0.3% in November.
- Unemployment rate: 3.5%, unchanged from November.
The contradiction is best shown on the chart below, where “consent” and then “denial” with the weak points of the report were completed in the 1H candle in Gold:
Later on, Gold price resumed the rally which proved to be unsustainable on Monday.
So, what could the genuine market response to the unemployment report be?
The failure of price to sustain the gains even in the short-term suggests that the market has largely discounted the negative parts of the report and the reason is probably the following. Despite a smaller than expected increase in the number of new jobs, the unemployment remained unchanged at the level that Fed officials characterize as close to “full employment”. In the context of such low unemployment, a slowdown in job creation may occur due to the difficulty of finding new workers, which can be a sign of overheating! This issue was often mentioned in the surveys of firm managers by the FRB of Philadelphia. However, the main sign of overheating in the labor market i.e. wage inflation, is absent! As I noted above, the pieces of the report do not come together (not only for the markets, but also for the Fed, which puzzles over why low unemployment does not create pressure in wages). This adds to the difficulty to deciphering the reason why jobs growth slowed in December.
If we consider separately the wage inflation, the biggest point of concern for the Fed, then everything is simple – weak print in December only confirms the Fed plans to keep rates at current level at least until the end of 2020. So, no surprise to expectations from the weak wage growth.
Less obvious but nevertheless concerning point of the report was the job cut in the US manufacturing sector by 12K. The markets’ “bet” on mini expansion in 2020 is based on the rebound of the “spring” of global manufacturing sector as tariff war fears abate, but with the December NFP update these hopes becomes less rosy.
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