Market Update: Investors Brace for Impact of Jobless Recession Indicator

In the lead-up to next week’s Federal Reserve meeting, global markets are in a state of anticipation, with the November payrolls report taking center stage. Investors have been closely monitoring softening signals from the U.S. labor market throughout the week, and the significance of the upcoming employment report has contributed to a temporary freeze in market activity.

While this week has seen various employment indicators suggesting a loosening of the labor market, it remains to be seen whether the overall employment report will confirm these signals. The enthusiasm for potential rate cuts in the market adds an extra layer of complexity to the situation.

Consensus forecasts anticipate a 180,000 increase in non-farm payrolls for the last month, an unchanged jobless rate at 3.9%, and a moderation in annual wage growth to 4.0%. However, the private sector jobs report for the same period fell below expectations, weekly jobless claims edged higher, layoffs increased, job openings declined more than anticipated, and employment costs were revised downward.

An interesting development this month revolves around the widely-watched ‘Sahm rule’ threshold. This rule historically indicates that a recession is underway when the three-month rolling average unemployment rate rises half a point above the low of the prior 12 months. The gauge, developed by Fed economist Claudia Sahm, reached 0.33% for the first time since March 2021, and if November’s jobless rate exceeds 4%, it could trigger concerns.

Adding complexity to the analysis is the resolution of autoworkers’ and actors’ strikes, which had distorted jobless readings. The end of strikes by the United Auto Workers and SAG-AFTRA actors union members could influence the November jobless rate.

Despite strong bond and stock gains throughout the week, driven by expectations of Fed easing next year, markets are consolidating on Friday. Fed futures now indicate a more than 50% chance of the first rate cut in the cycle by March, two quarter-point cuts by June, and 125 basis points of easing by the end of next year.

While two-year Treasury yields have been somewhat restrained, 10-year yields tested 4.1% for the first time since June before retreating ahead of the jobs report. The volatility in Treasuries has led to the highest volatility gauges since October.

On Wall Street, stock futures are stable after a strong rally on Thursday, led by tech stocks. The dollar has also strengthened, even against the Japanese yen, which surged almost 4% on Thursday amid speculation that the Bank of Japan could tighten monetary policy.

The downward revision of Japanese economic growth data for Q3 dampened this speculation, causing the yen to retreat. The U.S. crude oil price, down 27% since September, steadied around $70 per barrel, encouraging disinflation and fueling rate cut expectations.

Key developments expected later on Friday include the U.S. November employment report, University of Michigan December consumer sentiment and inflation expectations survey, and a meeting of ECOFIN EU finance ministers on bloc fiscal rules attended by European Central Bank board member Luis de Guindos. U.S. corporate earnings reports from Hello Group, Johnson Outdoors, and HashiCorp will also provide further insights.

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