🔥🔥🔥 It’s Payrolls Friday! And while the report wasn’t the hottest we’ve ever seen, it was CERTAINLY hotter than the market expected — especially given the weaker data releases earlier in the week! Here are my four key takeaways from today’s data:
1️⃣ Strong number, solid wages and higher participation should keep the soft landing narrative alive. Payrolls rose by 199k, more than the 185k average estimate, but the most relevant data point in today’s report seems to be the unemployment rate, which came in below EVERY economist estimate at 3.7%. I mentioned in a post earlier this week that a fall might be a false positive because it would likely happen if the labor force participation rate fell. But today’s release came in the context of higher-than-expected participation (62.8%), and that makes it look extra-strong. Wage growth also exceeded expectations at 0.4% on the month and came in at 4.0% on a year-over-year basis. That level of wage growth suggests the Fed still faces a tough task in restoring stable inflation into 2024.
2️⃣ The bond-bullish narrative has taken a hit with today’s report, and the aggressive rate-cut pricing for next year that we’ve seen develop over the past few weeks has been made to look vulnerable. As the dust settles a little, two-year U.S. Treasury yields are up 12 bps on the day to 4.72 percent, and the ten-year is nearing 4.25 percent, up 10 bps on the day. March rate cut odds, which were at 56% yesterday, have now slid below 50%. Market pricing of cuts for next 12 months, which had been at 120 bps, has now fallen 10 basis points to 1.10%.
3️⃣ Today’s report may raise some eyebrows in the FOMC, but to be honest, this report doesn’t do anything for next week’s Fed rate decision. That said, along with Tuesday’s CPI release, the reminder that the labor market remains tight may affect the Fed’s Summary of Economic Projections. While I do expect some shift, especially given I don’t think the Fed hikes next week, as they indicated in September, again, this report keeps the soft landing narrative alive. And while there’s a whole lot of data between now and the Feb. 1 decision, there’s still some uncertainty with where the Fed’s general mindset lies.
4️⃣ One concept you may start to hear about over the next few months is the Sahm Recession Rule. Created by economist Claudia Sahm, it essentially says that when the unemployment rate reaches a certain level, we will have already been in a recession for four months. The rule has a great record, with one false positive in 1959. Per Bloomberg, it would have triggered if the unemployment rate for November rose to 4.1% from its last value of 3.9%. With the unemployment rate back down to 3.7%, the Sahm Recession Rule’s trigger date for identifying a recession has been delayed. Going forward though, per Bloomberg, if the unemployment rate returns to 3.9% after the December report and rises to 4.0% in the January and February reports, the rule will be triggered in February.