Japan’s Kiuchi says stimulus package impact on inflation likely limited
Markets were already expecting that the Federal Reserve would cut interest rates again at next week’s policy meeting ahead of yesterday’s of ADP’s estimate of private non-farm payrolls for November. Following the release of jobs data, the news strengthened the dovish outlook.
ADP said that companies shed 32,000 jobs last month. The decline marks a reversal from the moderate gain in October. More importantly, the latest slide extends the downshift that’s been conspicuous for this data set since the summer. The report carries more weight these days for market sentiment due to the ongoing delay in official payroll data from the government.
Small businesses (with fewer than 50 employees) drove all the job losses last month. By contrast, large firms (50 or more workers) reported a net gain of 90,000 in November.
“Hiring has been choppy of late as employers weather cautious consumers and an uncertain macroeconomic environment,” said ADP’s chief economist, Nela Richardson. “And while November’s slowdown was broad-based, it was led by a pullback among small businesses.”
The news reinforces market expectations that the Fed will lower its target for a third time at the upcoming FOMC meeting on Dec. 10. The Fed funds futures market is currently pricing in an 89% probability for another round of easing.
The weak labor market data contributed to a decline in the policy-sensitive US 2-year Treasury yield on Wednesday. The drop to 3.50% reaffirms the downside bias that’s been unfolding in this key rate throughout much of the year, providing another market-based proxy in favor of a dovish policy outlook.
Some analysts question if the ADP data is a useful proxy for the delayed official payroll data. The ADP report “is too loosely correlated with the official data to be troubling,” advises Samuel Tombs, chief US economist at Pantheon Macroeconomics.
“Our model points to a first estimate of a 75,000 to 100,000 increase in private payrolls in November, which, after revisions and benchmarking, we think would be consistent with growth of about 25,000.”
Meantime, weekly jobless claims remain low, suggesting that layoffs remain muted. Paired with the Atlanta Fed’s strong nowcast for the delayed Q3 GDP report, the picture that’s emerging suggests that hiring has slowed, but layoffs aren’t spiking and the economy isn’t buckling.
Friday’s delayed update on PCE inflation for September is expected to show that pricing pressure is steady at just below 3%, based on the year-over-year consensus forecast via Econoday.com.
Short of an upside inflation surprise, sentiment continues to favor softer monetary policy for the near term, Goldman Sachs advises:
“The much-delayed jobs report for September showed signs of a cooling labor market, and may have sealed a 25-basis-point cut at next month’s meeting of the Federal Open Market Committee (FOMC), writes Jan Hatzius, Goldman Sachs Research’s chief economist, in the team’s latest “Global Views” report. With the next jobs report scheduled for December 16 and the next consumer price inflation print due on December 18, he adds, “there is little on the calendar to derail a cut on December 10.”