The US labor market showcased surprising strength in December, adding significantly more jobs than anticipated and pushing the unemployment rate lower. This robust performance has implications for Federal Reserve policy and market expectations regarding future interest rate cuts.
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December saw a surge in job creation, with 256,000 new positions added, exceeding economists’ forecasts of 165,000 and surpassing November’s figure of 212,000. This marks the highest monthly job growth since March 2023. Simultaneously, the unemployment rate dipped to 4.1% from 4.2% in November, defying predictions of a steady rate. Furthermore, revisions to 2024 unemployment data revealed a stronger-than-initially-reported labor market, with the cycle high revised down to 4.2% from the previously reported 4.3%. Jefferies US economist Thomas Simons characterized the report as undeniably strong.
Wage Growth and Labor Force Participation
Wage growth, a key indicator of inflationary pressure, moderated to 0.3% in December, aligning with expectations and falling short of November’s 0.4% increase. Year-over-year wage growth also slowed to 3.9% from 4% in November. The labor force participation rate held steady at 62.5%. This balanced picture of a strong labor market with cooling wage growth offers encouraging signs for the Federal Reserve in its fight against inflation.
Impact on Federal Reserve Policy and Market Reactions
The robust jobs report has shifted market expectations regarding the timing of potential Federal Reserve interest rate cuts. Traders now see a less than 50% probability of a rate cut before June, according to the CME Fed Watch Tool. This contrasts with prior expectations of a rate cut as early as May. EY chief economist Gregory Daco noted the encouraging trend of a steady but cooling labor market, suggesting a shift in focus towards inflation developments in the coming months.
Following the report’s release, stock futures tied to major averages declined nearly 1%, while the 10-year Treasury yield climbed approximately 8 basis points to 4.78%, reaching its highest level since November 2023. Steve Sosnick, chief strategist at Interactive Brokers, emphasized that expectations of imminent rate cuts based on a weakening labor market are now unlikely.
Conclusion
The December jobs report paints a picture of a resilient US labor market, exceeding expectations on key metrics. This strength, coupled with moderating wage growth, has significant implications for Federal Reserve policy and market sentiment. While the robust performance postpones expectations of interest rate cuts, it also signals a potential shift in focus towards inflation data in the coming months. Investors will closely monitor economic indicators for further clues regarding the direction of both the labor market and monetary policy.
