The US jobs market showed unexpected strength in December, adding 216,000 jobs and undermining the case for the Federal Reserve to consider cutting interest rates.
The non-farm payrolls figure was up from a revised figure of 173,000 in November. The figures, collated by the Bureau of Labor Statistics, also showed that unemployment remained at 3.7 per cent in December.
The jobs data is a crucial metric for the Fed as its officials assess the health of the US economy — and Friday’s monthly update comes as economists and rate-setters debate how quickly and when the central bank should cut rates.
The unexpected jobs numbers immediately prompted traders in the futures market to reduce bets on a rate cut in March.
Stock futures fell and bond yields rose on the back of the stronger than expected figures, which suggest it will be tougher than anticipated for the Fed to beat inflation back to its 2 per cent goal.
The two-year Treasury yield, which moves with interest rate expectations, rose to 4.49 per cent, its highest level since mid-December. The 10-year Treasury yield, which reflects growth and inflation expectations, rose to 4.1 per cent, also its highest level since mid-
Economists had believed that the US jobs market had weakened in December, and would have bolstered the case for the Federal Reserve to consider cutting interest rates.
A poll by Reuters showed economists, on average, predict data published on Friday would show the US economy added 170,000 jobs in December, down from 199,000 in November.
The economists also said the number of non-farm payrolls, collated by the Bureau of Labor Statistics (BLS), would show a small rise in unemployment to 3.8 per cent in December, up from 3.7 per cent a month earlier.
Other employment data published by the BLS earlier this week showed the number of new job openings across the US in November fell to its lowest level in two years.
However, it has been a much better-than-expected year for the US labour market.
“We’re likely to have added over 2.7 million jobs over the course of 2023, which would be the strongest performance since 2015 if you exclude the Covid disruptions,” said Gregory Daco, chief economist at EY. “It’s an indication of the robustness of the labour market.”
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The Fed is betting on only a small rise in unemployment to 4.1 per cent by the end of 2024. Officials believe a rise of that magnitude would help lower inflation towards their 2 per cent goal without crashing the economy, paving the way for them to cut rates later this year.
The latest projections from US central bank officials, published in December, show they expect the Fed to lower borrowing costs by 75 basis points over the course of 2024.
However, some economists are doubtful that such a soft landing for the jobs market can be achieved.
“The least likely scenario, in my mind, is that the unemployment rate will gradually drift higher,” said Drew Matus, chief market strategist at MetLife Investment Management.
“I am predicting a shallow recession during the first half of this year. And in the past, when we’ve had a recession, we’ve seen the unemployment rate move higher fast.”
“The idea underlying the Fed’s message is that the labour market will just slowly weaken over time,” Matus added. “That’s usually not the way it behaves.” - Copyright The Financial Times Limited 2024
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