Normalisation of the job market
Macro Perspectives
Macro Perspectives
We get the December jobs report today.
We enter the New Year with anticipation of rate cuts coming down the line. It's a question of, how soon?
With that, we talked yesterday about the December inflation data coming next Thursday. If the data shows that December price inflation continued the slowing trend, it puts the end of January on the table for a first rate cut.
Why? With falling inflation, the real interest rate (difference between the Fed Funds rate and inflation) continues to rise, which means the Fed is effectively tightening policy by sitting steady at the current level of 5.25-5.5% Fed Funds rate - the risk of the Fed being overly tight and inducing deflation is becoming the bigger risk (than inflation).
So, will the employment report do anything to change that risk skew?
It shouldn't. The normalization of the job market (post-pandemic) back to pre-pandemic levels has been the clear trend and based on the employment data we've already seen this week, that trend is continuing.
We had the job openings data - this was the Fed's north star (destroying jobs in the name of inflation fighting). Jerome Powell was hyper-focused on the mismatch between job openings and seekers, with the fear job seekers had too much leverage in commanding wage gains - which could spiral higher, underpinning inflation.
As you can see in the chart below, the job openings have been clearly normalizing, all while the rate of people quitting jobs is at a three-year low.
Manufacturing employment has continued the trend of softening whilst ADP's independent payroll report shows jobs added in December are back in-line with the pre-pandemic average.
