Daily Market Pulse

Overall employment trends remain strong or at least too strong to entertain urgent rate cuts. The timeframe for any change of Fed policy as forecasted by the financial markets likely needs to be pushed out further given this stronger than expected report.

From the Fed’s standpoint, the fact that the labor force participation rate has declined must be very discouraging. The previous narrative had been that the job market was so hot that it was pulling people into the labor force. However, at participation rate of 62.5%, the rate has slumped to the lowest level since last February.

Market now pricing the probability of a March rate cut back to .2% vs original .6%. So much for all the forecasts about a recession in 2023, as we now have a December labor market with payroll gains accelerating, not slowing as originally forecasted. The prior months revisions somewhat hurt, but the overall numbers suggest the job market is still holding up better than expected.

Stock futures are at the lows, and treasury yields have jumped higher with the 2-year yield up 8bpts. The key level is the 10-year is 4.20%, which is where we were when the Fed met in December noting they were done.

EUR Despite strong number, the EUR/USD is right back to where we started before the number. Euro-zone inflation moved higher in December, which puts a spotlight on the tough path back to the 2% target the ECB wants as governments remove support for high energy costs. Consumer prices rose from 2.9% a year ago, up from 2.4% in November (per Eurostat) which matched the consensus survey of economists.

CAD Post employment number is lower after their jobs data noting the Canadian job market has stalled in December, while growth in hourly wages moved higher adding to signs of inflation. This is a double whammy for CAD, after the US employment data showed signs of unexpected strength. The combination of labor market weakness and lingering inflation is likely bad news for the Bank of Canada, and likely higher rates for longer.

GBP Dropped .6% post the US employment number. Prior to the release, UK consumer credit showed that individual borrowing costs rose in November. Furthermore, the S&P composite PMI for December improved to 52.1 vs 51. previously.

MXN initially moved higher post NFP, but then reversed lower along with most currency pairs. Several members of Mexico’s central bank talked about the need for adjusting their monetary policy stance, but advocated for a “cautious and gradual” approach once easing begins. Mexico continues to be investors choice with an “overweigh” status when compared to its emerging market peers. Investors are expecting the next administration to continue supporting Pemex regardless of the outcome.