The Federal Reserve has set a high bar for skipping a rate cut at the Dec. 18 meeting, but it's not out of the question. With inflation progress stalling recently and the S&P 500 surging, a November jobs report that points to a possible labor market reacceleration might throw a rate cut into doubt.
Thursday's initial jobless claims and a raft of other labor market data ahead of Friday's big jobs report have presented a mixed picture. Yet it's all consistent with Fed Chairman Jerome Powell's Wednesday comments that diminishing downside risk to the labor market suggests that there's no rush to cut rates again. "We can afford to be a little more cautious as we try to find neutral," the interest-rate level at which monetary policy is neither restrictive nor accommodative, Powell told The New York Times DealBook conference.
Initial Jobless Claims
New claims for jobless benefits remained historically modest, despite rising to a seasonally adjusted 224,000 in the week through Nov. 30 from an upwardly revised 215,000 the prior week. The four-week average of claims edged up to 218,250, but has come down from 241,000 in early August.
Economists had pointed to a rise in the number of people continuing to claim benefits as likely evidence that finding a job is getting increasingly difficult. However, that case looks a bit weaker after Thursday's data. Continuing claims fell 25,000 to a seasonally adjusted 1.871 million in the week through Nov. 23. Plus, the prior week's continuing claims were revised down by 11,000 from 1.907 million.
Jobs Report Expectations
Economists expect the November jobs report to show 200,000 new jobs — all of them in the private sector. The unemployment rate, which is based on a survey of households, is seen ticking up to 4.2% from 4.1%. The 12-month gain in average hourly earnings is seen ticking down to 3.9% from 4%.
Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics, estimates that hurricanes lowered employment by 51,000 in October, while strikes cost 38,000. If so, the underlying gain still would have only been 101,000, which is likely too little to keep up with growth in the labor force. Such tepid hiring, therefore, would mean a rising unemployment rate.
Pantheon expects a 250,000 rebound in job growth for November, but says even that would be "underwhelming" and consistent with a deteriorating labor market trend.
So how strong would Friday's BLS jobs report have to be to give the Fed pause? Given that job gains were negligible in October — as a 40,000 rise in government jobs netted out to a meager 12,000 overall increase — Friday's jobs report would have to show two solid months of job growth packed into one. That would mean something around 300,000 new jobs in November.
However, it's possible we'll get a big revision to October jobs data that makes it look better than first reported. BLS noted that the response rate for the employer survey was "well below average."
The unemployment rate could be an important swing factor. A rise to 4.2%, as expected, would make the Fed more comfortable in following through on a December rate cut. But an unexpected drop to 4% might be problematic, possibly signaling that tighter immigration controls are drying up labor market slack that has helped to moderate inflation and wage pressures.
Fed Rate-Cut Outlook
After the jobless claims data on Thursday, markets are pricing in 74% odds of a quarter-point rate cut at the Dec. 18 Fed meeting, according to CME Group's FedWatch page. That would lower the Fed's benchmark rate to a range of 4.25% to 4.5%.
Yet even though market confidence in a December rate cut remains high, Wall Street has somewhat reined in expectations for further cuts next year. Markets are currently on the fence between 50 and 75 basis points in rate cuts in 2025, assuming that the Fed does cut in December.
ISM Services
The Institute for Supply Management's service-sector index, released on Wednesday, unexpectedly softened in November as hiring moderated. The ISM services gauge slipped to 52.1 from 56 in October, falling closer to the neutral 50 level. The employment gauge eased to 51.5 from 53, but still came in above soft readings from August and September. Economists had expected a 55.5 reading for the overall index.
Companies responding to the ISM survey highlighted the effect of still-high interest rates and the potential of new tariffs as factors clouding the outlook.
Separately, S&P Global's service-sector activity index rose to 56.1 in November from 55 in October, marking the fastest expansion since March 2022.
S&P Global says that ISM surveys likely reflect business conditions at larger companies, with smaller and midsize companies underrepresented. Plus, ISM services reflect a much broader range of services than S&P Global, including construction, retail, public education and government health care.
S&P Global said a surge in new orders amid an absence of employment gains "hints at ongoing labor supply issues and the potential for stubborn wage growth."
ADP Jobs Report
ADP's employment report, the first major read on monthly job gains, showed that private-sector employers added 146,000 jobs in November, below 165,000 estimates, according to Econoday.
ADP's October job gain was revised sharply down to 184,000 from the initially reported 233,000. The three-month trend, which includes September's 159,000 gain, still points to modest improvement after a couple of soft summer months.
However, ADP is viewed as an unreliable predictor of what the official monthly Bureau of Labor Statistics employment report will show. The divergence between the two reports was unusually wide in October, as the BLS employer survey showed a loss of 28,000 private-sector jobs amid the Boeing strike and the temporary effect of hurricanes.
S&P 500
The S&P 500 opened near the flat line in early Thursday stock market action. That follows Wednesday's 0.6% advance to a new closing high for the S&P 500.
Through Wednesday, the S&P 500 is up 27.6% for the year, including a 5.25% gain since Election Day.
Be sure to read IBD's The Big Picture column after each trading day to get the latest on the prevailing stock market trend and what it means for your trading decisions.
