The December jobs report significantly exceeded expectations, painting a picture of a resilient and robust labor market that effectively eliminates the possibility of a Federal Reserve rate cut in January. The 256,000 increase in nonfarm payrolls, coupled with a substantial 478,000 jump in household survey jobs, signals a strong rebound from the hurricane and strike-related disruptions seen earlier. This positive momentum carries the economy into 2025 with an estimated 2.7% GDP growth for the fourth quarter, bolstering confidence in continued economic expansion. While previous data underwent minor downward revisions, the overall strength of the December report remains undeniable, suggesting the labor market is on solid footing. This positive trend is further reinforced by the research series, which closely mirrors payroll report criteria, showing a healthy increase of 102,000 jobs.
Despite the robust job growth, wage growth remained relatively moderate, registering a 3.9% year-over-year increase, slightly below expectations and down from the previous month’s 4.0%. The average workweek held steady at 34.3 hours, remaining above the lows observed earlier in the year, suggesting consistent demand for labor. Data on unemployment claims also confirms the recovery from prior disruptions. Initial claims are approaching the lows witnessed in 2024, indicating a healthy pace of hiring. However, continuing claims remain somewhat elevated compared to earlier 2024 levels, suggesting a potential slowdown in the rehiring process, a trend that warrants further observation.
The unemployment rate dipped to 4.1% from 4.2%, moving further away from the threshold that would trigger the Sahm Rule, a historically reliable recession predictor. While the recent uptick in unemployment had raised concerns, the December decline allays those fears, at least for the time being. Furthermore, the prime-age employment-to-population ratio, a key indicator of labor market health, improved in December. Although the three-month average of this ratio has been declining, signaling some softening in the labor market, the latest monthly reading offers a glimmer of optimism.
The market reacted to the strong jobs report with a rise in the 10-year U.S. Treasury yield, which reached a 52-week high of 4.76%. This increase reflects growing confidence in the economy and expectations of sustained growth. The real, inflation-adjusted yield on the 10-year Treasury is now at 2.29%, exceeding the averages observed during both the late 1990s and the post-global financial crisis period. This suggests a shift in market sentiment towards higher interest rates, driven by the robust economic data.
The stock market, however, reacted negatively to the positive jobs data, with stocks declining and erasing year-to-date gains. This counterintuitive reaction can be attributed to the market’s preference for lower interest rates, which tend to fuel speculation and boost valuations. The rise in bond yields, in contrast, can put downward pressure on stock prices. Even the high-performing “Magnificent Seven” tech stocks experienced a decline. Despite this overall negative trend, cyclical stocks, which are more sensitive to economic fluctuations, continued to outperform defensive stocks, suggesting that investors still anticipate a relatively low probability of a recession. However, the underperformance of small-capitalization stocks and banks hints at potential cracks emerging in this optimistic outlook.
Looking ahead, the upcoming consumer inflation (CPI) report will be a crucial data point. Consensus estimates project a rise in December CPI to 2.9% year-over-year, which, combined with the strong jobs report, is expected to solidify the Federal Reserve’s decision to hold off on any rate cuts in the near future. Market expectations for Fed rate cuts in 2025 have already been significantly reduced following the jobs report, with only one 25 basis point cut now anticipated, and that not until mid-year at the earliest. While the strong jobs report is fundamentally positive for the economy, its impact on market sentiment remains complex, with the potential for higher bond yields to continue influencing investor behavior. The upcoming CPI report will be closely watched for its potential to add further upward pressure on yields.
