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US payrolls expected to show continued resilience

It’s been a disappointing start to 2024 after equity markets on both sides of the Atlantic finished 2023 on an upswing, with European markets both closing close to record highs, while the Dow and Nasdaq 100 managed to put in new record highs.

After such a surprisingly resilient end to 2023 it is perhaps not surprising that we’ve got off to a more subdued start to the New Year given that a lot of the reason for the December rally was down to heightened expectations of multiple rate cuts from central banks over the next few months.

These bets appear to have been pared back in the past few days as bond yields tack higher on the back of economic data that while still lacklustre has come in slightly better than expected.

At the end of last year, US bond yields slid sharply in anticipation that the Federal Reserve would start cutting rates sharply as soon as the first half of this year, with some suggestions rather laughably pointing to a March cut by the US central bank. This remains a highly unlikely outcome given the current underlying resilience of the US economy which is likely to be reinforced by today’s December payrolls numbers.

The trend lower in yields accelerated after the central bank indicated revised down their 2024 dot expectations and suggested that they might start to look at cutting rates if the data supported such a move. The last part of that sentence appears to have been overlooked by the markets who, surprised by the sudden pivot, performed a handbrake turn on their rates outlook for 2024.

Part of the reason for the sharp reaction was due to surprise at Powell’s willingness to support the idea that the Fed is done on the rate hike front, and consider the possibility of rate cuts, and which saw the markets pick up this particular bone and run with it. This week’s minutes showed that while the topic of rate cuts was discussed, the direction for policy remained highly uncertain, and that the prospect for rate cuts still looked several months away.

This week’s labour market data has continued to show the US economy remains solid as far as the labour market is concerned with JOLTs data showing a modest slowdown to 8.79m vacancies, while yesterday’s weekly jobless claims slowed from 220k to 202k. 

Today attention turns to the December payrolls report. The November’s payrolls report saw a decent improvement on the October report, with 199k jobs added, while the unemployment rate slipped to 3.7%.

With the participation rate returning to 62.8% and wages remaining at 4%, the idea that the Federal Reserve could look at cutting rates as early as March comes across as fanciful in the extreme. Weekly jobless claims are also trending in the low 200k’s and just before Christmas US Q3 GDP was confirmed at 5.2%.

It is true that US jobs growth has been slowing in recent months, with the ADP payrolls report slipping to 101k in November despite yesterday’s rebound to 164k this week, however that is quite normal after such a long economic expansion. We’ve also seen improvements in recent manufacturing and services survey data which has shown that economic activity has been holding up reasonably well, and in some cases has been improving.

For today’s December payrolls report expectations are for 171k jobs to be added and for the unemployment rate to nudge higher to 3.8%.  

Away from the US the economy in Europe, while showing signs of an improvement in recent PMI numbers still looks extremely weak, with headline inflation slowing to 2.4% in November, and within touching distance of the ECB’s inflation target of 2%. At last month’s press conference ECB President Christine Lagarde doubled down on the central bank’s determination to meet that target insisting that rate cuts were not even being discussed.

This seems disingenuous given how poor recent PMI numbers have been, however today’s headline CPI numbers for December are expected to show why the ECB remains cautious with an uptick to 3% in headline CPI even as core prices slow to 3.4% from 3.6%.

When we look at headline PPI the numbers already tell a different story with annual inflation for November expected to show negative prices for the 7th month in a row at -8.6%, a slight improvement on October’s -9.4%. These price declines have been extraordinary when you consider that just over 12 months ago EU PPI was averaging over 34% during 2022.

The nature of these numbers along with the intrinsic weaknesses being exhibited by the EU economy continues to support the idea that the ECB will be first to cut rates in the coming months.  

EUR/USD – popped higher to 1.1140 at the end of last year before retreating. Remains in the uptrend from the October lows with support at the 200-day SMA at 1.0830. A break above 1.1030 has the potential to target the December peaks at 1.1140.

GBP/USD – still in uptrend from the October lows hitting a 4-month high above 1.2800 at the end of last year. On course for a move towards 1.3000 while above the 200-day SMA at 1.2520. The bias remains for further gains while above the 200-day SMA as well as support at the 1.2590 area.

EUR/GBP – still range trading with resistance at 0.8720 and support at the 0.8570/80 area. Bias towards downside while below 0.8670.

USD/JPY – support at 140.00 has held thus far with the US dollar rebounding back above the 200-day SMA at 143.20 with the potential to squeeze back to the 146.00 area, on a move through 145.00.


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