With the release of the US non-farm payroll data imminent, how will the market interpret this data?

Zhitong App learned that the highly anticipated December non-farm payroll report will be released by the US Department of Labor at 21:30 Beijing time on Friday. With market expectations that the Federal Reserve will start an interest rate cut cycle this year, people hope to see non-farm data that is neither strong enough to trigger more rate hikes nor slow enough to signal economic concerns.

In market terms, this kind of expectation of neither good nor bad is referred to as the "Goldilocks" economic phase, where the economy is neither too hot nor too cold, but just right.

Usually, it is difficult to achieve such expectations. However, analysts believe that in the current environment, the range of achieving this expectation may be quite large, and the probability of good news is higher than that of bad news.

Although the Dow Jones estimates that non-farm employment will increase by 170,000, Art Hogan, Chief Market Strategist at B.Riley Financial, said that the market's acceptable range is actually between 100,000 and 250,000.

"I just think that our tolerance for good news is much higher now because we know that this data is unlikely to lead to another rate hike," Hogan said. "It will only push for rate cuts."

In the current situation, the market generally believes that the Federal Reserve has completed rate hikes and may start cutting rates as early as March, ultimately reducing the benchmark interest rate by 150 basis points by the end of 2024. The recent messages from the Federal Reserve have at least to some extent pushed this expected trajectory. However, strong employment data may suppress the possibility of rapid policy easing.

"If we see non-farm data above 250,000, then people may think that we have to cancel the bet on rate cuts in March and may reduce rate cuts once this year," Hogan said. "Frankly, we know that the Federal Reserve has completed rate hikes now. If that's the case, it's obvious that good news may just be good news. It's just that the hope for rate cuts may be pushed to the second half of the year."

High hopes for rate cuts

Due to the underperformance of large-cap tech stocks sensitive to interest rates, the overall market has had a poor start to the new year. Traders expect the Federal Reserve to ease monetary policy, although such an aggressive rate cut plan may mean more than just winning the battle against inflation, but rather implying economic weakness and forcing the Federal Reserve to take action.

Hogan said that investors should consider this when considering the impact of rate cuts.

"The market is a bit excited about rate cuts and when they will happen," he said. "But people also need to pay attention to why rate cuts are happening."

He added, "If the wheels of the economy are falling off and the Federal Reserve has to take stimulus measures in a hurry, then that would be a bad rate cut, right? A good rate cut should be inflation continuing to move towards the Federal Reserve's target. So, if rate cuts can only be realized in the second half of the year, I think that's also good news."

Other details

As usual, the market will focus not only on overall employment data, but also on the health of the labor market.As a component of inflation, wages have always been a concern. The market expects a 3.9% growth rate in average hourly earnings over the past 12 months. If this proves to be accurate, it will be the first time since mid-2021 that wage growth has fallen below 4%.

The unemployment rate is expected to rise to 3.8%, which would mark 23 consecutive months of unemployment below 4%.

Julia Pollak, Chief Economist at online job market ZipRecruiter, said, "The overall picture is that the labor market is gradually slowing down in a very orderly manner. I expect employment numbers in December to continue to cool down, reaching around 150,000, and the unemployment rate may increase slightly as more people enter the labor market."

As of November last year, the labor force for 2023 had increased by approximately 3.3 million people, but this trend had little impact on the unemployment rate, which only rose by 0.1 percentage point compared to the same period in 2022.

However, Pollak pointed out that the hiring rate is still below pre-pandemic levels. One indicator used by the U.S. Department of Labor to measure job turnover is a good gauge of labor market confidence, as workers are more likely to quit if they are confident they can find a new job. During the so-called "Great Resignation" period in 2021 and 2022, the quit rate reached a peak of 3%, but has now fallen to 2.2%.

Nick Bunker, Director of Economic Research at Indeed Hiring Lab, stated that since then, the employment situation has changed overall, with the once hot tech industry now lagging behind in job vacancies, while the healthcare industry is leading the way.

Bunker said, "We are seeing a labor market that is not as tight and hot as it was in the past few years. But it has entered a seemingly more sustainable state."