US - Labour market weakness to keep the Fed cutting
After a long drought of data, the labour market report hit hard. October payrolls fell by 105k, while November payrolls increased by 64k. Combined with a small rise in the participation rate, this led to the unemployment rate rising to 4.6%, from a high 4.4% in September. Part of this might be due to misreporting from furloughed workers during the government shutdown, which would be temporary.
Still, the government also fundamentally lost workers. As suggested in our week ahead preview, October saw large DOGE cuts, at 162k federal job losses, while November saw an additional 6k. November data shows that hiring was supported by construction and health care services. Manufacturing payrolls are at their lowest level since March 2022, in contrast to the stated goals of the Trump administration's industrial policy.
Overall, the new data suggests a continuously weakening labour market. While the uptick in participation rate is a positive sign, the contraction in hiring and slowing of hourly earnings growth point to weakness. Real earnings growth is only moderately positive. This is bad news in terms of affordability, but good news in terms of second round inflation effects, which might provide the Fed with some more leeway to focus on the labour market side of the mandate.
We should note that all of this data is even more noisy than usual. Data collection was impacted by the government shutdown and large revisions are likely. Still, data continues to evolve in line with further rate cuts over the course of next year. We still expect a pause in January but expect moderate headline inflation and a continuously weakening labour market to tilt the balance towards another 75bps of gradual easing over the course of the year.