December Jobs Report Not to be Underestimated
After the Federal Reserve raised interest rates for the first time in 12 months in December and signaled an intention to do so again three times in 2017, it’s fair to say that Friday’s jobs data isn’t exactly the most eagerly anticipated report we’ve had for a while. It would be a mistake though to underestimate it.
For the first time in a long time, market expectations are broadly in line with those of the Fed and another rate hike isn’t being priced in until the middle of the year, at which time we’ll have had access to an incredible amount of economic data including half a dozen jobs reports.
Source – CME Group FedWatch Tool
When put this way, it makes sense to view Friday’s jobs report as being of lesser importance, particularly compared to those of the last year when the next hike always appeared to be just around the corner. The only problem with this assumption though is that expectations change, constantly, and with markets as volatile as they currently are, I don’t expect investors to be any more dismissive of the data.
Especially when you consider that one of the key takeaways from the FOMC minutes on Wednesday was the possibility of unemployment undershooting the level at which the central bank believes it should settle at in the long term, which could result in a build-up of inflationary pressures.
While the FOMC minutes suggested the upside and downside risks are fairly balanced at the moment, largely due to the unusual level of uncertainty surrounding Trump’s policies, it may take less than we think for conditions to tip in favour of faster rate hikes, from the gradual pace that the Fed is currently anticipating.
It’s also worth considering that the Fed has a dual mandate, inflation and maximum employment. As we’ve seen, the link between low unemployment and rising wages and inflation has weakened during the recovery from the global financial crisis for a number of reasons, which has enabled the Fed to adopt a cautious approach to tightening, despite unemployment being at late 2007 levels. Should the link strengthen again, as the Fed expects it will eventually, then at these low levels of unemployment, wages could rise quickly and force the Fed to respond with more rate hikes.
With all this in mind, there are a number of components of Friday’s jobs report – NFP, unemployment, participation and average hourly earnings – that will be of interest to the Fed and could alter expectations going forward. Investors will be paying close attention to each of these on Friday for signs that inflationary pressures are building and rate hikes will need to come thicker and faster than is currently priced in.