Non-Farm Payrolls could inform the timing of the next Fed move as Wall Street tests records

The latest Non-Farm Payrolls report for December is forecast to paint a mixed picture of the US labour market.

Economists forecast lower jobless rate, modest jobs growth

The US labour market is expected to have improved marginally in December. Economists forecast that the jobless rate dropped to 4.5%, courtesy of an increase in employment of 65,000. That’s down from 4.6% in November, with employment growth roughly steady. Wage growth is tipped to pick-up to a robust but well anchored 3.6%.

(Source: Bloomberg, Capital.com)

This Non-Farm Payrolls release is the first since the US government shutdown that won’t be hampered by both labour market disruptions and disruptions to data collection. As a result, it’s the clearest picture of the state of US employment conditions since September. Overall, it’s expected to reveal a resilient but lukewarm labour market that’s adding jobs at a modest pace and remains slightly above notionally full employment.

Debate continues to rage about why jobs growth has slowed. Theories range from weaker demand for labour from softer economic conditions, to supply shocks related to US immigration policy and potentially artificial intelligence. Any clues about the nature of the softness in the labour market could inform expectations about the appropriate policy response and whether the US Federal Reserve ought to cut rates further.

Futures curve points to further Fed cuts in 2026

The Federal Fund Futures curve continues to point to further rate cuts from the US Federal Reserve in the year ahead. The rates market is baking in two further cuts going forward, with the first fully priced in for the middle of the year. That’s before rates are reduced to a trough rate just above 3% by the end of 2026.

 

(Source: Bloomberg, Capital.com)

Rates prices have been supported by dovish Fed rhetoric. The central bank’s guidance has emphasised a balance of risks that skews towards a softer labour market, with inflation expected to continue to moderate throughout the year. Further evidence of a lukewarm labour market will add support to the case for future cuts, albeit after what’s shaping as a short-pause at the start of the calendar year.

NASDAQ looks poised to breaks-out ahead of NFPs

Wall Street is hovering just below record highs going into the Non-Farm Payrolls figures. A soft print that shows suboptimal labour market conditions could be treated as a “bad news is good news” dynamic as it raises the prospects of further US rate cuts. A solid print could also be bullish because it signals a resilient labour market. The downside scenario is if the data shows a precipitous drop in labour market activity, raising fears of a meaningful slowdown in US economic activity.

Going into the jobs release, Wall Street hovers around record highs and in a clear uptrend. The NASDAQ has underperformed other major indices as investors rotate marginally into cyclical sectors that stand to benefit from further rate cuts. From a technical standpoint, the NASDAQ is carving out a symmetrical triangle pattern, typically a set-up associated with consolidation within a continued uptrend. A break-out would potentially open a re-test of record highs around 26,200. A break-down could invite further selling.

(Source: Trading View)
(Past performance is not a reliable indicator of future results)