NEWS AND INSIGHTS | INSIGHTS

CIO Notebook: Closing Out ‘23 With Better-than-Expected December Payrolls

January 05, 2024
Shannon Saccocia, CFA, Chief Investment Officer—Private Wealth

December’s non-farm payrolls came in above expectations driven by gains in government, health care, social assistance, and construction

December’s non-farm payrolls release this morning came in above expectations at +216k versus consensus of +175k, driven by gains in government, health care, social assistance and, interestingly given the colder weather, construction. Leisure and hospitality, which had driven a meaningful portion of job gains in the first half of 2023, remain solid but stable, indicating perhaps that the supply-demand imbalance in those industries is moving back toward equilibrium. Transportation and warehousing jobs were lower in the month, possibly reflecting a continued decline in goods demand, which we have seen flowing through to goods inflation data.

Hours worked ticked back down to 34.3 and average hourly wages rose by +0.4% month-over-month and +4.1% year-over-year—both higher than expectations of +0.3% and +3.9%, respectively. The unemployment rate remained steady at 3.7% versus expectations of 3.8%, but that was primarily due to the decline in the participation rate from 62.8% to 62.5%. In terms of the narrative, this decline in the participation rate, coupled with the uptick in average hourly wages, is potentially the most disruptive as the Federal Reserve (Fed) views a return to the pre-pandemic participation rate above 63% as critical to dampen upward pressure on wages (and end prices).

While this month’s print came in higher than anticipated—although admittedly the whisper numbers were almost all for a reading above consensus—both October and November non-farm payrolls were revised lower, by -45k and -26k, respectively. However, even with these revisions, we believe that evidence of labor market demand continuing to eclipse supply as represented by wage growth gains is likely to weigh on the Fed’s decision to effect more accommodative monetary policy.

In terms of market reaction, according to the CME FedWatch Tool, the probability of a rate cut in March moved from 73.4% to 53.6% over the last six days; this repricing is being felt by both equity and bond investors alike. As of yesterday’s close, the S&P 500 Index was down -1.7% to start the year, while the 10-Year Treasury yield has pushed over the 4% mark after closing the year at 3.87%.

While the continued upward pressure on wages is certainly complicating, we do not believe that this will result in a meaningful change in the overall trend: inflation is moving lower and the Fed and other central banks will at some point respond to lower prices by cutting interest rates. However, economic data is likely to play a pivotal role in the timing of those policy shifts. As a result, we anticipate that the dissection and digestion of these data releases are likely to continue to move markets for the foreseeable future.

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