The stock market may be boosted initially by the successful US action in Venezuela, but then turn cautious as this week's key US economic data may not be weak enough to push the Fed to ease at the end of the month. A more likely window for a Fed rate cut is in the Spring (see my December 14 blog). Nevertheless, expectations of strong Q425 corporate earnings should restrain any pullback.
The December Employment Report is expected to show Payrolls and Unemployment in the same range that had prompted the Fed to cut rates last year. However, with a number of Fed officials saying the Fed already has eased a lot and further progress against inflation is needed to justify additional rate cuts, a more significant weakening in the labor market may be needed to sway them to a dovish position.
Consensus looks for a modest +55k m/m increase in December Nonfarm Payrolls (+50k Private Payrolls), which is a smaller increase than the +64k in November (+69k Private) and the +78k m/m prior 12-month average. However, the risk is for a larger increase than November's, based on Continuing Claims (see table below). The bi-weekly ADP Private Payroll Estimate also points to a speedup in Private Payrolls, and consensus looks for the monthly ADP Estimate to show a 50k increase after -32k in November. While both Continuing and ADP give the same signal for December, Continuing remained a more consistent predictor of speedups/slowdowns in Private Payrolls in November. Keep in mind that the Fed thinks the monthly change in Payrolls is overstated by 60k, so they would consider a near-consensus print to indicate a decline in Payrolls.
The improvement in Continuing Claims in December also suggests that consensus is right in looking for a dip in the Unemployment Rate to 4.5% from 4.6% in November. Rounding analysis also keeps open the possibility of a dip. The unrounded Unemployment Rate was 4.56% in November, so it doesn't take much to round down to 4.5% in December.
Consensus also expects Average Hourly Earnings to return to a trend 0.3% m/m in December. The y/y would edge up to 3.6% from 3.5% with this m/m change. This could be the most important part of the Report, particularly if AHE slows to 0.2% or less.
This week's delayed release of the Q325 Productivity Report will provide a broader measure of labor costs. Consensus looks for Nonfarm Productivity to rise 3.0% (q/q, saar), versus 3.3% in Q225. Both are well above the 2.1% trend in 2024, albeit that the Q225 pace was just a rebound from a decline in Q125. The Fed will like a strong Productivity print (and the risk is for a larger increase than the consensus estimate) as a way to prevent labor costs from being inflationary. This is seen in Unit Labor Costs, which are expected to climb only 1.0%. A 4.0% rise in Compensation/Hour -- the broadest measure of labor costs -- falls out of the calculations. This is in line with the 4.0% y/y pace in Q225 and 4.4% y/y pace in Q424. So, it would indicate steady nominal wage inflation. Note that the Fed will likely wait to see if the large productivity gains continue before raising its estimate of longer-run non-inflationary growth significantly.
This week's other data are expected to be little changed from the prior month or trend. The December Mfg ISM is seen up slightly to 48.3 from 48.2 in November. The JOLTS Data are expected to show Job Openings edging up to 7.73 Mn in November from 7.67 Mn in October.
Private Payrolls (m/m change, 000s)
ADP Estimate First-Print BLS Latest-Print BLS Continuing Claims *
March 155 209 120
April 62 167 133 14
May 37 140 69 -74
Jun -33 74 -27 -57
Jul 104 83 77 18
Aug 54 38 -4 2
Sep -32 119 104 28
Oct 42 na 52 -41
Nov -32 69 na 14
Dec na na na 30
* the inverted change in Continuing Claims between Payroll Survey Weeks, 000s
