The recent employment report, surpassing expectations, showcased a resilient economy with a seasonal addition of 199,000 jobs in the past month. This boost, partly attributed to the resolution of auto strikes, outpaced October's job increase of 150,000. The unemployment rate, experiencing a dip from 3.9% to 3.7%, reflected a healthy job market, hindered only by a growing labour pool. Average hourly earnings surged by 4% year-over-year, underscoring improved purchasing power amid moderating inflation.
Despite the robust job market, investors awaiting signals from the Federal Reserve's rate-setting committee were met with a status quo. Treasury yields ascended on Friday in response to the Fed's decision to maintain current rates, defying expectations of a potential shift to lower rates early next year. Nonetheless, indications point to a probable move towards lower rates as the Federal Reserve, led by Chair Jerome Powell, gears up for preparations early in the upcoming year.
Despite its overall strength, a key driver for the anticipated rate decrease is the perceptible slowdown in the job market. A year-on-year decline in job creation, with a report on diminishing job vacancies, hints at a cooling demand for workers expected to persist into the new year. The Federal Reserve's overnight rate, reaching its highest level in over two decades, emerges as a constraining factor on the economy.
Moreover, the job market appears to exert minimal inflationary pressure. Aligned with the Fed's 2% inflation target, the 4% growth in paychecks corresponds well with the recently revised Labor Department figures indicating a 2.4% increase in productivity in the third quarter compared to the previous year.
Inflation, displaying signs of abatement, is projected to continue to decline. The core measure of the Fed's preferred inflation gauge, excluding volatile food and energy items, recorded a 3.5% rise in October year-on-year. Over the past three months, it maintained a 2.4% annual rate. Various goods, including appliances, toys, and used cars, experiencing price declines from a year ago, contribute to the envisaged continued decrease in inflation, along with a marked deceleration in newly signed lease rents.
FOMC Meeting
As the Federal Reserve convenes, policymakers are poised to adopt a "bias to tighten" on Wednesday, a precautionary stance in the face of potential inflationary reacceleration. Projections are anticipated to reveal a marginally lower interest rate target at the end of the next year, though not aligning with current investor expectations. Jerome Powell, in Wednesday's press conference, is expected to maintain the key fed funds rate within the 5.25%-5.5% range and reiterate his commitment to inflation control.
The CME Group's FedWatch tool indicates a 45% chance of a 0.25 percentage points rate cut by the Fed in March. Investors are monitoring crucial inflation data, including the November Consumer Price Index on Tuesday and the Producer Price Index on Wednesday. These releases are expected to affect market dynamics and influence the Fed's decisions on rate cuts.
Fullerton Markets Research Team
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