December’s unemployment report was considerably stronger than expected as the economy added the most jobs since March and the unemployment rate unexpectedly fell.
The data confirmed that the labor market held up last year despite higher borrowing costs, lingering inflation and political uncertainty. While demand for workers moderated and the unemployment rate rose in 2024, the economy still added 2.2 million jobs—below the 3 million increase in 2023 but above the 2 million created in 2019.
A question that still has not been definitively answered is why the Labor Participation Rate (LPR)—the share of the population that is working or looking for work– remained unchanged at 62.5%.
If the LPR returns to pre pandemic level, the unemployment rate would be closer to 6%.
The Treasury market sold off across the curve, sending the benchmark 30-year Treasury to above 5% for the first time in more than a year. Ten-year yields rose to the highest since 2023.
Swap traders are now pricing in only 30 bps of total Fed cuts this year. Long-dated Treasury yields have climbed over 100 bops since the Fed began cutting interest rates in September.
As inferred, all of the above is a surprise. Why the unexpected strength?
Has the economy changed dramatically where the data collected is no longer representative of productive output? Is the data corrupted by the political process? Is it the result of the re-onshoring of productive capacity to more friendly shores?
Probably all of the above. The data is further evidence of a boomflation economy…strong growth but also strong inflation.
Speaking of inflation, the University of Michigan Consumer Sentiment Survey showed a big jump in the median 5-10 year inflation expectation to 3.3% from prior month (and expected) 3.0% reading. This is the highest reading (relative to the prior month end data) since June of 2008 according to Bloomberg.
Inflation is a two-part phenomenon; too much chasing too few goods fearing higher prices tomorrow. It has a monetary and psychological component, hence the great emphasis of any Central Bank attempting to control inflationary expectations.
Will this week’s release of several key inflation indices further question the progress of taming pricing pressures?
Will the narrative change to expecting no cuts for the year? What about a rate increase, an event no one has suggested?
Commenting on Friday’s equity markets, stocks sold off across the board as “good news is bad news” as it threatens the interest rate scenario accepted by many. Oil advanced 4% on threatened Russian and Iranian sanctions, low inventories and bitter cold.
The economic calendar is comprised of both the PPI and CPI, import/export prices, a small business sentiment survey, retail sales and the Beige Book or the statistical compilation utilized at the upcoming Fed meeting.
Last night the foreign markets were down. London was down 0.37%, Paris down 0.81% and Frankfurt down 0.70%. China was down 0.25%, Japan down 1.05% and Hang Seng down 1.0%.
Dow and NASDAQ futures are down 0.25% and 1.25%, respectively, on interest rate concerns. Oilis up another 2% on potential sanctions against Russia and Iran and continued cold weather. The 10-year is off 4/32 to yield 4.78%.
