Mixed NFP Report / a Surprising dip in the ISM Employment component / What lies ahead?

"We may never know where we are going, but we'd better have a good idea of where we are"

Friday saw the release of the much awaited NFP data print and along side the ISM Non Mfg PMI which is a survey based measure.

An analysis of the NFP data should not only focus on the headline number but also various other details like revisions, participation rate, employment rate etc. On the surface reading, the numbers showed strength as can be seen in the table below:

	NFP▲	UR (in %)	AHE mom	AHE yoy
Nov-23	173,000	3.7	0.35%	3.96%
Exp	1,70,000	3.8	0.29%	3.90%
Dec-23	2,16,000	3.7	0.40%	4.10%

The prior two months were revised lower by 71K with the Oct - Dec average at 164,667 compared to Jul - Sep 3 month average of 221,000 which clearly points to a decelerating trend in Employment gains.

The unemployment rate was steady at 3.70% due to a drop in Labor participation rate. Under the hood, the Civilian Labor Force declined by 676,000 and the number of employed people fell by 683,000. 

For the uninitiated, Participation Rate (PR) is Labor Force / Civilian Non Institutional Population *100 and Unemployment Rate (UR) is Unemployed / Labor Force * 100

Under the ISM Non-Mfg release, along with the headline number, the most important sub - components are the Employment, New Orders and Prices Paid. It is a survey based measure and hence a leading indicator. The Employment Component is an input for Economists in estimating the NFP numbers. 

The ISM N-Mfg PMI numbers came in at 50.60, much below consensus estimates of 52.60 and prior reading of 52.70. The employment index dropped to 43.30 levels which is below the levels seen since Aug 2020. The new orders and the prices paid index softened to a reading of 52.80 (prior 55.50) and 57.40 (prior 58.30). 

Overall, as WSJ writes, the December Job's report does not scream "change your policy stance" for the Federal Reserve. The job market is not heating up again but maintaining a healthy tempo or as Fed likes to call coming in a better balance. 

The strength in the Job's report saw USTs sell off but the sharp deterioration in the employment component of the ISM saw USTs bid back again. The week saw US yields close higher and US2s10s bear steepened.

Yields	W. High	W. Low	W. Close	WoW Change
US 2Y	4.49	4.25	4.38	13.30
US10Y	4.10	3.87	4.05	18.40
US2s10s	-0.33	-0.42	-0.33	5.10
US30Y	4.23	4.02	4.21	18.60
JGB 10Y	0.64	0.60	0.61	1.00

On Dec 27, 2023 the implied market pricing of rate cuts for 2024 touched an extreme of 160 bps / 3.73% and has since corrected to currently reflect 136 bps of rate cuts. ADP numbers, Initial Jobless & Continuing Claims, NFP numbers and FOMC minutes suggested that the market may have gotten ahead in terms of pricing cuts. Commentary from Fed Speakers this week will inform the bias the Federal Reserve Officials are leaning towards. 

Over the weekend, Dallas Fed President, Lorie Logan expressed some concerns about market getting ahead of the Fed on rate cut expectations. She also commented that given the rapid decline of the ON RRP, I think it's important to consider the parameters that will guide a decision to slow the runoff of our assets. In my view, we should slow the pace of runoff as ON RRP balances approach a low level. Normalizing the balance sheet more slowly can actually help get to a more efficient balance sheet in the long run by smoothing distribution and reducing the likelihood that we'd have to stop prematurely. As WSJ notes, analysts say could occur by midyear. 

The economic data scheduled for release this week

First Tier Data this week includes the CPI and the Core CPI estimates. 

CPI rose 0.10% mom, 3.12% yoy in Nov and est. to show a rise of 0.20% mom and 3.20% yoy
Core CPI rose 0.28% mom, 3.99% yoy in Nov and est. to show a rise of 0.20% mom and 3.80% yoy

Markets would be focused on the Services component of the Inflation which grew 0.54% mom and the shelter inflation which grew 0.45% mom in the month of November. Read the article for more on Shelter inflation. 

Following the CPI estimates, Market would be closely reviewing the Initial Jobless Claims and Continuing Jobless Claims data for confirmation to the trend seen in ISM Services Employment index and then end the week with the data on PPI which is expected to rise to 1.30% yoy from prior reading of 0.90%.