In November, the U.S. labor market demonstrated notable strength, with the addition of 199,000 jobs, a significant increase from the 150,000 jobs added in October. This surge in non-farm payroll employment, as reported by the Bureau of Labor Statistics, surpassed expectations and signaled resilience in the face of higher interest rates. Consequently, the unemployment rate dropped to 3.7%, down from 3.9%.
This robust employment growth tempers expectations for imminent Federal Reserve rate cuts, a sentiment echoed in the futures markets where traders reduced the probability of a quarter-point rate cut in March. The current target range for rates is between 5.25% and 5.5%. Despite this, lower rates are still anticipated for May, although economists suggest that borrowing costs might not change until the latter half of the year.
The Federal Reserve, aiming for a balanced approach to control inflation without provoking a recession, finds encouragement in this strong labor market data. The Federal Open Market Committee, set to meet next week, is expected to maintain current interest rates. Fed officials emphasize the need for sustained disinflation and economic softening, particularly in the labor market, before considering rate cuts.
One area of concern for the Fed is wage growth. November’s data showed a 0.4% month-on-month increase in average hourly earnings, translating to an annual rate of 4%—a figure considerably higher than what the Fed deems comfortable for controlling inflation.
The employment numbers were partly influenced by a recent agreement between major U.S. car manufacturers and the United Auto Workers union after a six-week strike. This agreement counteracted a significant job loss in the automotive sector in October.
In response to the employment report, U.S. Treasury bond yields increased. The two-year Treasury yield, closely tied to interest rate expectations, climbed to 4.74%, while the 10-year yield rose by 0.1 percentage points to 4.23%. Meanwhile, U.S. stock markets, initially opening lower, rallied later in the day with both the S&P 500 and the Nasdaq Composite gaining 0.4%, reaching their highest levels in approximately 20 months.
