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The US labour market showed unexpected strength in December, adding 216,000 jobs and undermining the case for the Federal Reserve to consider cutting interest rates as soon as March.
The non-farm payrolls figure was up from a sharply lower revised figure of 173,000 in November. The figures, collated by the Bureau of Labor Statistics, also showed that unemployment remained at 3.7 per cent in December.
The jobs data is a crucial metric for the Fed as its officials assess the health of the US economy and move closer towards a decision on when to lower rates from their current 22-year high.
Markets whipsawed after the jobs data was released, with traders initially taking the higher-than-expected number as a sign that the Fed would be less likely to cut rates soon. The two-year Treasury yield, which moves with monetary policy expectations, rose to its highest level in nearly a month immediately following the jobs figures.
But the publication of ISM data later that morning, which showed that the US services sector slowed meaningfully in December, reversed the earlier market reaction. US stocks rose at the open with both the S&P 500 and the Nasdaq Composite up 0.5 per cent in mid-morning trade.
The chance of a rate cut in March was back up to around 80 per cent after the ISM figures were published, having fallen to around 60 per cent earlier on Friday.
While the new jobs figures complicate life for rate-setters, they were welcomed by the US administration, which is keen to highlight labour market strength.
“This morning’s report confirms that 2023 was a great year for American workers,” US President Joe Biden said.
As well as creating more than 2.7mn jobs over 2023, US workers also saw their hourly pay rise by 4.1 per cent last year — more than headline inflation, which was 2.6 per cent in the year to November.
Hourly wages rose 0.4 per cent in December, according to Friday’s data.
While the job numbers for December were far higher than the 170,000 projected by economists polled by Reuters, revisions meant job creation figures for November and October were both much lower than previously thought.
“Payroll gains are now averaging 165,000 over the past three months, down from 204,000 in the prior report,” said Dante DeAntonio of Moody’s Analytics. “The labour market definitively slowed in 2023 and we expect that trend to continue in the new year.”
Though the White House benefits from the rise in real wages, officials at the Fed believe pay growth at the rates experienced during 2023 will make it trickier to bring inflation back down to their 2 per cent goal.
Gregory Daco, chief economist at EY, said the December figures showed wage growth was in excess of the Fed’s “comfort zone” of 3.5 per cent. But he added that he expected a slowdown in coming months as the US economy adds “a growing pool of available workers, including from immigration”.
The labour force participation rate edged down by 0.3 percentage points to 62.5 per cent in December.
“Particular attention is likely to be paid [by policymakers] to the wage growth figures, which run the risk of reinforcing services-based inflation which has remained stubbornly above the Fed’s preferred range,” said Jason Pride at Glenmede Investment Management. “This could reinforce how unrealistic the market’s call for six or seven rate hikes may prove in 2024.”
Fed officials expect to make three quarter-point cuts over the course of this year.
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