Daily Market Color

Labor Market Flexes Muscles Ahead of Inflation Week

Labor and service sector data spark volatile session. Strong labor market data sent rates as many as 10bps higher in the early stages of the session, as nonfarm payrolls, wages, and the unemployment rate showcased a still-strong labor sector. That said, rates would quickly reverse course after the ISM Services Index contracted the most in three years, evidence of a slowing service sector. The volatile session would ultimately end with rates (generally) 1-5bps higher, a quiet conclusion to a day with a 15+ bp trading range.

ISM (Institute for Supply Management) Services Index Graph

Labor data points to soft landing. Nonfarm payrolls and wages surprised to the upside and the unemployment rate stayed flat at 3.7%, evidence that the labor market remains strong. Nonfarm payrolls were 216k in December, a 41k beat over the 175k estimate, while average hourly earnings rose 0.1% to 4.1% YoY. The figures are yet another sign that the economy has held up (so far) despite the Fed’s torrid pace of rate hikes.

U.S. Change in Nonfarm Payrolls Graph

Inflation week ahead: core CPI and PPI largely expected to decline. The week ahead features CPI and PPI, where core prints are largely expected to decline from November to December. Core CPI is expected to decline both MoM (0.3% to 0.2% in December) and YoY (4.0% to 3.8% in December), a welcomed move as the Fed prepares to cut rates in 2024. Meanwhile, core PPI should decline YoY (2.0% to 1.9%) but rise MoM (0.0% to 0.2%). Futures currently imply a 70%+ chance of a rate cut by the FOMC’s March meeting, though an inflation surprise could throw that into doubt.

U.S. Core CPI (Consumer Price Index) YoY Graph

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