US January Jobs Report Preview: Downside Risks Dominate

In addition to Friday’s January CPI inflation numbers, both releases will help determine the near-term path for the Fed funds rate. As of writing, futures are pricing in a 20% chance of a rate cut in March (-5 bps), with -50 bps of easing implied until year-end, and June’s meeting fully priced in for a cut (-26 bps).

Heading into the event, economists expect the US economy to have added 70,000 payrolls, up from the 50,000 reported in December (LSEG). With that said, the estimated range is wide, spanning a high of 135,000 and a low of -10,000. From my perspective, anything north (south) of 100,000 (30,000) would be statistically significant according to the forecast distribution.

Analysts expect the unemployment rate to remain unchanged at 4.4% (forecast range: 4.5-4.3%). Whilst YY average earnings are forecast to ease to 3.6% from 3.8% in December, MM is expected to remain at 0.3%.

Data Disappointment Ahead of the Event

• January ADP private payrolls number came in much lower than expected at 22,000 (vs 46,000 forecast [37,000 previous]). While its correlation with government figures is seldom observed, it is worth noting that it aligns with softer metrics recently released.
• The December JOLTS Job Openings cooled to 6.5 million vacancies, with the quits rate remaining around historical lows of 2.0%. Hiring has also remained unchanged. Ultimately, this suggests employers are cautious in their hiring, and workers continue to lack confidence to voluntarily leave their employment, reaffirming the ‘low hire-low fire’ stance.
• The January Challenger report revealed that US employers announced 108,435 job cuts, marking a substantial jump from 49,795 reported in the same month a year ago. Interestingly, January’s total is also the highest since 2009. Bear in mind that while this is an early warning signal, not all announced layoffs translate into job losses, and there is a notable lag between the announcement and the actual job loss.
• While we did see the ISM Manufacturing PMI headline number reverse course and jump back into expansionary territory at 52.6 (the ISM Services headline also remained in expansionary space at 53.8), the employment sub-indexes for both reveal that while the jobs market is not catastrophic, it is by no means good and hiring remains tepid, at best. This was particularly evident in Services, which dropped to 50.3 from 51.7 in December.
• If you look at your economic calendar’s revisions to these data, you will note that since around mid-2023, downward revisions have been commonplace. These are incredibly important to monitor. While the headline number could be positive and even beat analysts’ estimates, the persistent large downward revisions we have been seeing mean job growth has been trending south, and is currently negative according to the three-month average.

NFP Trading Scenarios

Neutral Print

A print that aligns with market forecasts would shore up support for the Fed’s current ‘no rush’ stance, essentially aligning with the central bank’s narrative of a stabilising labour market and fully price out a March cut.

However, the language will likely emphasise that the door is open for cuts later in the year if further weakness is observed. Ultimately, this could only be moderately positive for yields and the USD, as it is not new information for market participants.

Bullish Print

A positive surprise, with payrolls coming in at 100,000 or higher, would suggest robust hiring and prompt a hawkish repricing of Fed rate expectations, potentially pushing out a rate cut beyond June. Given the breadth of soft data and the USD remaining overstretched to the downside, this would likely offer the best risk-reward, triggering a notable move higher in yields and the USD. If unemployment remains at 4.4% or even drops to 4.3% (the minimum estimate), it should add fuel to the USD upside, I believe. A triple whammy could occur if wage growth remains at current levels or increases.

Bearish Print

If payrolls come in below 30,000, unemployment ticks up to 4.5%, and average earnings miss expectations, this could weigh on yields and the USD, increasing the probability of a March or April rate cut despite inflation risks.

Conclusion

The weight of evidence tilts toward downside risk. However, with USD positioning stretched to the downside and soft data well telegraphed, markets may be vulnerable to a meaningful short squeeze on any beat above 100,000.

Written by FP Markets Chief Market Analyst Aaron Hill