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Wall Street 'astonished' by jobs report, and push back expectations of Fed easing

Javier E. David
Editor focused on markets and the economy

Rumors of the U.S. jobs market’s demise appear to have been exaggerated.

A labor market that’s managed to defy the most dire economic predictions was met with effusive praise by Wall Street economists, whom for the most part were largely slack-jawed by the brisk pace of job creation.

On Friday, the Labor Department reported that the economy churned out 266,000 jobs in November, smashing through expectations and underscoring how slower growth isn’t necessarily translating into a weaker jobs market. 

By all indications, the data was a certified blockbuster —and diminished expectations of more aggressive monetary stimulus from the Federal Reserve.

“Our call for three cuts in the federal funds rate next year stands, but our aggressive call that the [Fed’s Open Market Committee] could change their minds by the January meeting is undermined by today's surprisingly strong nonfarm payrolls number,” banking giant UBS said in a note.

“Even though the FOMC will fade the strength from the report, they will see it as a reason to wait for more data. Consequently, we see the first rate cut happening in March, and then April and June,” it added.

Job creation was salutary and broad-based, with the unemployment rate inching to a 5-decade low at 3.5%, wage growth quickening by 3.1%, and even the beleaguered manufacturing sector adding new positions. Meanwhile, September and October numbers were upwardly revised.

Indeed, as President Donald Trump took a victory lap on Twitter — in the process taking aim at his Democratic foes spearheading an impeachment inquiry in Congress —  market observers found it hard to dispute him this time around.

“In one word: Astonishing,” wrote Ian Shepherdson, chief economist at Pantheon Macroeconomics. He characterized the November figure as “wild” given the lingering effects of the General Motors strike that distorted October’s data, and cautioned that the numbers could still be revised lower next year.

“At this point, though, we’re going to call this an outlier report. It doesn’t change our view of the trend, or our expectation of soft Q4 GDP growth,” Shepherdson wrote. 

“A repeat of this performance in December would be a different story, but we think downside correction is more likely. Still, today’s print clearly makes a January Fed easing much less likely,” he added.

‘Jobsgiving’—but about that next fed cut...

View form above "Now Hiring" text on desk above computer keyboard

The data had the added effect of allaying fears about the economy, even amid tortured U.S.-China trade negotiations. 

“This highlights that conditions remain firmly in place for the consumer and the service sector to cushion the economy from external risks and related weakness in U.S. manufacturing,” said Brian Coulton, chief economist at Fitch Ratings.

With the jobs report converging with a better-than-expected read on December consumer sentiment by the University of Michigan, JPMorgan Chase said that its real-time recession tracker plunged to its lowest in nearly 4 months.

Fourth-quarter growth is now tracking at 1.45%, a modest pace but rising from the prior read of 1.36%, the firm found. 

Assigning an “A-” grade to the report, Refinitiv’s chief economist Jeoff Hall lauded the 54,000 job rise in manufacturing and 90,000 combined leisure and health care positions added during the month. 

The hospitality sector “is the fastest growing sector of the jobs economy,” he said, but added the caveat that those jobs remain “its lowest paid.”

The jobs report’s sole negative impact was to dial down expectations for more Fed easing — a big risk given a market that’s demanded aggressive easing and growth that’s skewed to the downside. 

“We do not see significant implications of today’s report for monetary policy, beyond further ruling out the possibility of additional cuts in the short-term,” Goldman Sachs said on Friday.

BNP Paribas jokingly called the data “jobsgiving,” but warned that it would likely embolden the Fed in its stance to hold the line on rates. It may even prompt them to “upgrade to its assessment of the labor market at its December meeting,” the bank’s analysts wrote.

Still, others offered a more measured take. “With GDP growth likely to slow further in coming quarters and inflation pressures likely to remain benign, we see the case for further Fed interest rate cuts in the New Year,” ING’s analysts wrote on Friday. 

“While the market is currently pricing in just one more rate cut, we see a strong chance that the Fed steps in with a little more support well before then, with two rate cuts predicted” in the first half of 2020, they added.  

Yet if the jobs market remains firm, economists think the Fed will remain in its holding pattern — especially with the general election looming and the central bank’s prior rate cuts still working their way through the economy.

“After the sharp slowdown at the start of the year, the recent rebound in employment growth is clearly encouraging, and suggests that the loosening in financial conditions this year is starting to support the economy,” said Andrew Hunter, senior U.S. economist at Capital Economics.

Javier David is an editor for Yahoo Finance. Follow Javier on Twitter: @TeflonGeek

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