Despite tomorrow’s pending employment report, Iran tensions and a phase one trade deal with China remain the primary focus of markets. After November’s strong report, December’s results may appear weak in comparison no matter what they show.
Expectations are for little wage growth once again amid an overall tempered report. Consensus estimates range from 125,000 to 210,000 new jobs for December with the overall consensus at 160,000. In a different context and time, 160,000 additional jobs would be viewed as an impressive number possibly spurring market rallies. Here and now however, investors will be concerned with what it means for interest rates going forward.
With little wage growth and no major reduction in job sectors, the Fed will have no reason to adjust rates higher. As long as these job reports include a range of expectations, money will likely remain cheap and many will keep borrowing to invest. This will set up conditions to push asset prices higher as more money flows into the market.
Headwinds like trade wars are still realistic and at the forefront of investors’ minds, but even these have been shrugged off over the past few months as interest rates have moved lower. Investors still have enormous amounts of cash at their disposal and few comparable places to invest versus US equities.
While this employment report is important to the US consumer, it is only as important as its impact on future interest rates. Should the report deliver weak data, the market will react based on what that could mean for interest rates. Traditionally, the Federal Reserve was less responsive to these reports and would not act unless necessary. In the past 3-5 years, we have seen the Fed shift to a much more proactive approach actively try to subvert recessions through monetary policy.
Given the expectation of a standard employment report with little upside or downside surprise, it is reasonable to assume the market will react in the same manner. This of course ignores one of the key tenets of trading, anything can happen when you least expect it. Traders planning to trade around tomorrow’s employment report should be prepared for volatility and have a plan in place to protect themselves from any possible market surprises.
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