US bucks expectations with 216,000 new jobs

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The US bucked expectations by adding 216,000 jobs last month, capping a week in which strong economic data led investors to scale back their bets on interest rate cuts.

Friday’s non-farm payrolls figure, which was higher than both forecasts and November’s total of 173,000, came on the same day the eurozone reported its first rise in inflation in eight months.

“The December employment report was stronger than consensus across the board,” said Stephen Stanley, chief US economist at Santander.

Stanley added that, although the figures were not as strong as they first appeared, they “absolutely argue against” the recent “expectation of early and aggressive rate cuts from the Fed this year”.

Thomas Barkin, the president of the Richmond Fed and a voting member of the Federal Open Market Committee in 2024, said in Baltimore on Friday that the jobs data suggested the labour market was “normalising nicely” following a series of rate increases by the central bank. 

Expectations of cuts as early as March by the Federal Reserve and the European Central Bank played a big role in 2023’s late-year stock and bond rally.

But investors have retreated on their rate forecasts since trading resumed this week, particularly after Fed minutes revealed most officials wanted to keep borrowing costs high “for some time”.

Fed officials expect to make three quarter-point cuts over the course of this year and have hinted that rates may need to remain on hold throughout the first quarter.

“The [jobs] report plays into the Fed’s view that March might be too soon,” said Jason Pride at Glenmede Trust, a wealth management firm.

“It solidifies policymakers’ opinion that their plans for three cuts this year — and not the market’s for six or seven — is the right thing to do.”

Over the past week the odds traders ascribe to a Fed rate cut in March have fallen from 100 per cent to about 70 per cent — despite a slight rebound later on Friday after the publication of weaker than expected services data.

The probability of a March cut in the eurozone has fallen from roughly 65 per cent to less than 50 per cent, putting a dent in a recent rally in bond markets. The single currency area reported December inflation of 2.9 per cent on Friday, up from 2.4 per cent the month before.

The S&P had edged upwards 0.1 per cent by midday trading on Friday, after losses earlier in the week.

The jobs data is a crucial metric for the Fed as it considers when to lower rates from their current 23-year high.

The figures, collated by the Bureau of Labor Statistics, also showed unemployment remained at 3.7 per cent in December.

“This morning’s report confirms that 2023 was a great year for American workers,” said US President Joe Biden. His administration is keen to emphasise labour market strength in an election year when he has to overcome a deficit in the polls against his likely opponent, former president Donald Trump.

The US created more than 2.7mn jobs over the course of the year, with hourly pay increasing 4.1 per cent — more than headline personal consumption expenditure inflation, which reached 2.6 per cent in the year to November.

While the job numbers for December were far higher than the 170,000 forecast by economists in a Reuters poll, downward revisions for previous months meant the figures for November and October were much lower than earlier thought.

Dante DeAntonio of Moody’s Analytics said between October and December a monthly average of 165,000 jobs a month had been created — down from 204,000 calculated just last month.

“The labour market definitively slowed in 2023 and we expect that trend to continue in the new year,” he added.

Fed officials still worry pay growth at 2023’s rates will make it more difficult to bring inflation back down to their 2 per cent goal.

But Gregory Daco, chief economist at EY, said he expected a slowdown in wage growth 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.