The last NFP report released in 2022 triggered intense volatility in financial markets. Good economic news is bad news for stocks and excellent news for the US dollar – this was the environment financial market participants operated for most of the year.
It all comes down to what the market already priced in regarding the Fed’s actions. An economy that still creates jobs will keep the Fed hawkish – hence the market reaction in selling stocks on a good NFP report.
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However, it is always worth looking at the overall picture and reading the entire report before concluding. As such, the market reversed by the Friday closing, as details showed that the NFP report was not as hawkish for the Fed as initially thought.
US job growth is slowing
The market expected 200k new jobs to be created in November. Instead, the reality showed that 263k were created, much more than the initial expectations.
Hence, the better-than-expected number explains the initial market reaction.
But a closer look at the data reveals that job growth in the United States is slowing. A downward trend started about a year ago, and last Friday’s data confirms it.
Weaker labor supply and strong wage growth
The initial market reaction was based on the fact that the Fed would be forced to be more hawkish. The combination of a weaker labor supply and strong wage growth should push the Fed funds rate higher.
So what is the correct way to interpret last Friday’s report?
On the one hand, the report implies that the Fed will be more hawkish. On the other hand, job growth is slowing down.
The conflict between the two explains the initial market reaction and then its reversal of it. Plus, this is December, with many market participants already on holiday.
Therefore, any market reaction this month should be taken with a grain of salt.