NFP All More Critical After JP Speech

After Powell signalled that slower rate hikes are coming, the focus now shifts to whether jobs data will continue to give Fed more room to deal with inflation.

Wage growth outlook

The job market remains relatively tight, according to the latest report by the BLS, with 10.3 million jobs open and only 6.1 million people looking for work. That implies that the Fed's rate hikes so far haven't created a major unbalance in the labour market, and the Fed can keep focusing on inflation without endangering its second mandate. After the shot in the arm to market sentiment following Powell's comments on Wednesday, the focus on the jobs numbers relates more to economic health than potential impacts on monetary policy.

November Non-Farm Payrolls are expected to show 210K net jobs were created last month, down from 261K in October. However, it should be noted that results have recently been coming in well above analysts; estimates. The unemployment rate is once again expected to remain steady at 3.7%, with the participation rate unchanged.

Jobs vs wage growth

Yesterday, quarterly core PCE was reported at 4.6%, slightly hotter than the 4.5% expected. This is the preferred measure of the Fed for inflation. One of the contributing factors to that is wage costs. Wages in the US have been rising below the inflation rate, which is one of the factors contributing to demand destruction. This is despite a significant mismatch in openings compared to people seeking work.

However, that gap is starting to close. Last month 216k jobs were added, but 353K jobs went off the market, suggesting that job destruction continues. Average hourly earnings have been slowing down and are expected to show growth of 0.3% in November compared to 0.4% in the prior month. Generally, it's understood that labour market tightness helps push up wages. But the trend has been for fewer jobs available each month, which could reduce pressure on wages and inflation. That could be another point in the list of reasons markets could continue to expect the Fed to move closer to the pivot in the coming meeting.

Cable in accelerated mode

The pound has traded above the ascending channel originating at $1.0328 for several sessions in November. After a retest of the upper trendline, the pattern hints at a clear uptrend now, at least until prices slide back within the channel. $1.19 (S1) is a major stronghold above the $1.1760 (S2) floor, with the peak of $1.2150 (R1) opening the door to $1.2293 (R2).

Key takeaways

The Fed has signalled it considers slowing the pace of rates, but the latest jobs report shows that the labour market is still relatively tight, which helps push up wages. This means that the Fed can keep focusing on inflation without endangering its second mandate but has to also deal with rising PCE inflation and rising wages. However, job destruction continues to outpace job creation and might bring the Fed closer to the pivot.