November's surprisingly strong jobs report makes it less likely the Fed will move to cut interest rates, and it could sound even more hawkish when it meets next week.
A so-called hawkish Fed is one that is more likely to move to tighten policy than make it looser by cutting interest rates or taking other measures. After three cuts this year, the Fed has signaled a neutral stance, where it is on hold but watching economic data.
The 266,000 jobs added in November is an important number since it defies expectations, at least for one month, that the labor market is slowing down. The report was much better than the 187,000 jobs expected by economists.
The end of the GM strike helped inflate the number, with 41,300 jobs added in motor vehicles and parts, but the overall gain in payrolls was still about 100,000 better than expected by many economists. Manufacturing gained 54,000 overall.
"The bottom line is the labor market is cooking. It clearly says the Fed should not do anything more. The Fed can now sit back on the shelf, not have to worry about having to be pestered about lower rates," said Ward McCarthy, chief financial economist at Jefferies.
Stocks jumped and bond yields initially rose after the jobs report was released. The fed funds futures market moved to erase one rate cut that was priced in for next year, and the market was pricing just about 20 basis points of one quarter point cut in morning trading, according to Michael Schumacher, director of rates at Wells Fargo Securities.
"The Fed was made more of a sideshow with this number," said Schumacher. "You think back to [Fed Chairman Jerome] Powell's comments of the last month or two. It seems to me he doesn't want to cut again. This takes away a little more impetus to cut."
The focus of the market in the week ahead is likely to be more riveted on trade than the Fed, because of President Donald Trump's looming Dec. 15 deadline on $156 billion in new tariffs on China, if there's no trade deal.
Strategists expect the Fed to leave its economic forecasts and interest rate outlook little changed when it releases new projections after its Wednesday meeting. The Fed has emphasized that it is on hold as long as the economy continues to show a moderate pace of growth and low inflation.
"They're pretty comfortable where things are at, and as long as we get a trade truce, they're fine," said Diane Swonk, chief economist at Grant Thornton. "There were people who wanted to sound a lot more hawkish at that last meeting. They did get two dissenters not wanting to cut rates further and many presidents going into the meeting saying we didn't need an additional cut."
Swonk said the jobs report showed the impact from trade, and that will be an important topic for the Fed. The gain in manufacturing, an area hit by trade wars, is still lagging, with most of the gains coming from the GM workers.
"Forty percent of the gains were in health care and leisure and hospitality, with food services driving it. Anything not affected by trade is holding up," she said, but she added that retail is weak as online retail continues to take jobs from brick-and-mortar stores.
Ian Lyngen, head of fixed income strategy at BMO, said while it is unlikely, the strong jobs report has raised the question of whether the Fed would actually consider raising interest rates next year.
"I still think they cannot hike as long as the labor market is strong and growth is okay, but they don't have inflation," said Lyngen. "Inflation is a bigger deal to this Fed than what's going on in a very tight labor market."
Swonk said the Fed is still more likely to move to cut than raise interest rates.
"I think they will wait and see. I think much depends now whether the tariffs are rolled back. The biggest issue for the Fed is do we get more of a detente in the trade war that allows them to firmly stand on the sidelines," Swonk said.
John Briggs, NatWest Markets head of strategy, said traders were already expecting a hawkish Fed at the meeting next week because they had expected no change in the Fed's rate cut forecast. Now, the strong jobs number could make the Fed's tone sound even more so, when Powell briefs the media after the meeting Wednesday afternoon.
"We expect a good holiday season, and the job market just continues to power ahead and support the consumer," said Briggs. "That's been the story of 2019, and we're finishing with the same theme — weak manufacturing and a resilient consumer." Powell should reinforce that message.