Health of U.S. labor market looms large on markets’ radar this coming week

Investors and economists would probably welcome a slow return to the working world world this coming week but sadly that’s not likely to happen.

Next week is packed with important U.S. economic data and Federal Reserve speakers that will test the markets’ belief that interest-rate cuts are coming fast and furious in 2024 beginning in March. Traders in derivative markets now expect 150 basis points of benchmark rate cuts in next year, according the CME’s FedWatch tool.

December ISM factory index

Wednesday, 10:00 a.m. Eastern

There has been talk that the factory sector had hit bottom but the data is expected to continue to be disappointing. Economists expect the headline index to stay below the 50.0% break even level between contraction and expansion for the 14th straight month in January. The consensus forecast of economists polled by the Wall Street Journal expect a slight improvement to 47.3 in December from 46.7 in the prior month. If the data comes in as expected, it fits with expectations of many economists that the economy will slow markedly in the first few months of the year, keeping alive talk of recession.

FOMC minutes from Dec. 12-13 meeting

Wednesday, 2 p.m. Eastern

The markets reacted strongly after the December Fed meeting, especially Fed Chairman Jerome Powell’s remark that cutting interest rates was discussed at the meeting and projections from officials for three quarter-point rate cuts in 2024 instead of two. Subsequent attempts by Fed officials to gently suggest the market might have overreacted to the “fed pivot” have fallen on deaf ears. “Maybe the minutes will better capture the nuances of the Fed’s game plan,” said Sal Guatieri, senior economist at BMO Capital Markets.

December jobs report

Friday, 2 p.m. Eastern

Economists expect the labor market to lose some of its luster in December, with job gains of 170,000 down from 199,000 in the prior month. The unemployment rate is expected to tick up to 3.8% from 3.7% in the prior month. Wage gains are expected to cool a bit to 0.3% after a solid 0.4% gain in November.

If the data comes in as expected, it fits with the moderation in GDP growth seen in the final three months of 2023 after the strong 4.9% annual rate in the prior quarter.

A stronger number would be a signal to the market that rate cuts are not coming as fast as the market expects, said Stephen Stanley, chief U.S. economist at Santander.

December ISM service sector index

Friday, 10 a.m. Eastern

Economists expect the headline index to remain comfortably in expansion territory in December, only slipping to 52.5 from 52.7 in the prior month. In contrast to the manufacturing sector, the service sector has only had one month of contraction since the depths of the pandemic in the spring of 2020.

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