December non-farms preview – a seasonal surprise in store?

What are the expectations?

The US is expected to have added 200K jobs in December, down from 263K in November. The unemployment rate is forecast to remain at 3.7%, essentially around the same level it began 2022. Wage growth is expected to be 0.4% MoM, down from 0.6% a month earlier, and 5% YoY, in line with last month.

What’s the context?

The NFP report follows hard on the heels of the ADP payroll figure, which was released a day later in the week due to the New Years’ Day holiday. This smashed forecasts with a 245,000 increase, compared to the expected 140K. Meanwhile, annual pay rose 7.3%, sending a warning that tomorrow’s wage number might also rise by more than expected.

Apart from stellar months in March and August, non-farm payrolls have stuck around the 200K mark for most of the past year. US employment has been remarkably solid since the pandemic, and as noted before, it will have to weaken materially before it starts to have an impact on the Fed’s thoughts about cutting rates.

As seen in this chart, NFPs usually drop below 50K at least six months before a US recession arrives:

On this basis, it doesn’t look like one is about to start any time soon. While this doesn’t mean the Fed will hike for too much longer, it might suggest that those expecting rate cuts before Q4 2023 at the earliest are likely to be disappointed:

What’s the market impact?

A strong NFP reading might give the dollar a near-term lift, but it’s going to be hard to rediscover the magic that powered the greenback’s surge through most of 2022. The Fed probably only has a couple more hikes in the tank, and at 50bps apiece these don’t really have the excitement of the 75bps moves that were such a feature of last year.

Today’s strong ADP figure is a step in the right direction, but it will need months of above-forecast readings to really get the Fed back into a firmly hawkish mood (or at least, a much more hawkish mood than it is now). The market is now convinced that the Fed’s big hiking efforts are behind it, and it is going to take a lot to change that view.

While the dollar has stopped going down for now, it has a long way to go before it is back in the kind of effortless uptrend that we saw in 2022. Instead, a short-term bounce might just set up the dollar index for its first lower high, with a reversal lower below the 200-day SMA a notably bearish development.

In a similar vein, the Dow has been positively brimming with apathy after its October and November rally. It has remained wedded to the 30,000 area, with no sign that it will join the Dax and others in moving back towards the December highs and push on from here. Its lower tech weighting means it is doing much better than the S&P 500, which is still stuck below the 200-day MA, but there doesn’t seem much enthusiasm for a fresh rally at present.

With earnings season just around the corner this hesitancy is understandable, so perhaps those looking for a trade here will just have to keep their powder dry for now and await developments. It doesn’t look too bearish right now – for that it would have to drop back below 32,000, but the bullish view is, at best, on pause.