Is The Jobs Market Finally Slowing?

Tomorrow brings the final jobs report before the FOMC’s highly-anticipated December meeting, where the central bank will decide between a fifth consecutive 75 basis points (bp) rate hike and a slight slowdown to a 50 bp rate hike.

According to the CME’s FedWatch tool, traders are currently pricing in a 1-in-3 chance of another 75 bp rate hike, with an implied two-thirds probability of a downshift to 50 bp. That said, a particularly strong or weak jobs report, especially if confirmed by the inflation data (PPI and CPI) in the first half of December, could still prompt the Fed to change its path, so expect some market volatility around the release regardless.

NFP Report

Source: StoneX

Are the expectations for NFP justified? We dive into the key leading indicators for Friday’s critical jobs report below!

NFP forecast

Given the vagaries of the calendar, we won’t have access to enough leading indicators to make a firm forecast for this month’s NFP report but based on the limited figures we have access to, there’s some evidence that the labor market has deteriorated over the last month. The 4-week moving average of initial unemployment claims has ticked up, while the just-released ADP employment report showed just 127,000 net new jobs were created in November, the lowest reading since January 2021. Notably, there was an outright drop of -86,000 jobs in goods-producing sectors, suggesting that manufacturing activity is slowing ahead of the holiday season.

Regardless, the month-to-month fluctuations in this report are notoriously difficult to predict, so we wouldn’t put too much stock into any forecasts (including ours). As always, the other aspects of the release, prominently including the closely-watched average hourly earnings figure which came in at 0.4% m/m in the most recent NFP report.

Potential NFP market reaction

Potential NFP Market Reaction

The US dollar index had a rough month in November, breaking below several of the key areas that had reliably provided support for this year’s uptrend. The longer-term damage to the dollar’s uptrend is undoubtedly severe, but in the short term, the world’s reserve currency is arguably oversold and could be more likely to see a bounce in the wake of NFP, as long as the reading isn’t terrible.

As for potential trade setups, readers may want to consider sell opportunities on EUR/USD on a strong NFP reading. The world’s most-widely traded currency pair has formed a potential double top near 1.0500 over the last couple of days and has plenty of room to pull back toward the 1.01-1.02 area after surging higher by hundreds of pips over the last couple of days.

On the other hand, a soft jobs report could present a short-term sell opportunity in USD/JPY. The pair has been in a dominant uptrend throughout most of the year, but November’s big drop and the lack of a recovery bounce so far suggest that it may give back more of its gains if the data continues to support a “pivot” to smaller interest rate hikes from the Fed and rates break below support near 137.50.

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