Unemployment Ticks Up

STOCK INDEX FUTURES

The indexes edged lower following November’s nonfarm payroll report, which came in above expectations at 64,000, while revisions to August and September saw the labor market shed 33,000 jobs. August’s figure was revised from -4,000 to -26,000, while September’s figure dropped from 119,000 to 108,000. Gains in the labor market came from the healthcare sector, which gained 46,000 jobs and tends to move acyclic and hires regardless of economic conditions. Employment fell in transportation and warehousing and federal government, which is down 271,000 since January as the Trump administration has reduced the size of the government workforce. In a sign of labor market weakness, the unemployment rate edged up to 4.6%, up from 4.2% in November of last year. October’s report, which suffered from a lack of data and required changes to the statistical weighting process showed that the US economy lost 105,000 jobs in the month. However, it should be noted that this data has not been revised and will likely see changes in January’s report. Elsewhere on the data front, retail sales in October showed no change in growth at 0.0%, coming in below expectations of 0.1% growth.

Services and manufacturing PMI data from S&P Global will be out later in the morning for an update on private sector activity.

CURRENCY FUTURES

US DOLLAR: The USD index remained lower following the release of November’s jobs report. The report showed an uptick in unemployment, which will be notable for officials at the Fed. However, markets are still implying a 24% chance of a rate cut in January, which is unchanged from yesterday. Inflation data out Thursday will help offer further clues on the direction of monetary policy following Fed chair Powell’s lack of hawkishness last week that caught markets off guard. Only two voters dissented from cutting rates, far below an expected pushback of five. Markets are pricing in two rate cuts for 2026, while the Fed’s summary of economic projections was unchanged at just one. Powell suggested a rate hike is off the table and that it was not any policymakers base case.

EURO: The euro is higher following the release of domestic data and the labor figures from the US. Business activity in the eurozone slowed in December per S&P Global PMI surveys. Manufacturing activity fell to an eight month low, reflecting a PMI reading of 49.2, below expectations of 49.9 and signaling that activity contracted. The weak reading was primarily attributable to Germany, where the index fell to a reading of 47.7, its lowest reading since January and underscores a continued downturn in manufacturing conditions. New orders declined and output contracted as part a of a drop in exports sales and weaker demand. Hower, German expectations for future conditions rose to a six month high. In the services sector activity slipped, falling to a three month low with a reading of 52.6. Still, the services sector marked an expansion in activity as growth continued for the seventh straight month. Firms reported that they continued to hire, reflecting strong demand conditions, while output price inflation remained stable. Elsewhere, the ZEW Indicator of Economic Sentiment for both the Eurozone and Germany rose to a five month high as trade worries eased. The European Central Bank meets on Thursday and is expected to hold rates steady at 2.0%. Although the bank is expected to leave rates on hold possibly until 2027, speculation has been growing that the next move could be a rate hike. Money markets are implying a 29% chance of a rate hike in December 2026. Focus at the bank’s meeting will center around the ECB’s growth and inflation forecasts. Near term growth expectations are likely to be revised up, while inflation forecasts are likely to be revised down, as a stronger euro has had deflationary effects on the economy, which in growth terms has proven resilient. Ahead of Thursday’s meeting, final CPI data for November is scheduled for Wednesday.

BRITISH POUND: The pound is higher following unemployment and wages data that surprised to the upside. Unemployment claims came in just under expectations at 20,100 for November, while October’s figure was revised from 29,000 claims to -3,900, reflecting a drop in unemployment claims from September. The unemployment rate ticked up to 5.1% from 5.0%, in line with forecasts. However, average earnings in the country rose above expectations, possibly a worrying sign for the Bank of England in its battle against inflation. Average earnings plus bonuses rose 4.7% in October well above forecasts expecting a 4.4% gain, while September’s figure was revised upwards to 4.9% from 4.8% previously. Members at the BoE have been worried that an uptick in inflation could lead to higher wage demands and further pressure prices. Still, price pressures in the country have been easing with inflation recently ticking down to 3.6% from 3.8% alongside the passings of a government budget that is expected to knock half a percentage point off inflation entirely. Markets will await CPI inflation data out tomorrow for further clues on the inflation picture and if the bank can possibly go ahead with further cuts in 2026. Elsewhere, S&P Global PMI data showed that UK services and manufacturing sectors both expanded above expectations in December, reflecting greater certainty about economic outlooks with the passage of November’s budget. Money markets have priced a 90% chance of a rate cut, as some policymakers at the BoE have signaled that inflation pressures are well-contained. However, Thursday’s meeting is likely to bring a tight vote, where governor Andrew Bailey could cast the deciding vote.

JAPANESE YEN: The yen is higher, maintaining strength following November’s labor report. The Bank of Japan’s policy decision comes on Friday, where markets have largely priced in a rate cut from the central bank, lending focus to any signals about future tightening of rates next year. It is likely that the bank will stress that the pace of further rate hikes depends on how the economy reacts to the initial increase in rates. The BoJ said that most of the companies it surveyed expected to raise rates at the same rate they did in 2025. This was a factor, which the bank had said was necessary in order for it to begin raising rates. Meanwhile, the bank’s Tankan corporate survey showed that big Japanese manufacturers’ business sentiment hit a four-year high in the three months to December. Future price moves from the yen will depend on guidance from the BoJ alongside external indicators, mainly US data.

AUSTRALIAN DOLLAR: The Aussie is little changed unchanged in what is to be a quiet week of data after labor figures last week showed a surprise drop in employment, which led markets to slightly scale back bets on a rate hikes next year. Employment in Australia fell by 21,300 in November as full-time jobs more than reversed a large increase the previous month. However, the unemployment rate held steady at 4.3% despite markets forecasting a rise to 4.4% as fewer people went looking for work. However, the RBA still views the labor market as tight, citing high job vacancies, widespread staffing shortages, rising labor costs, and other indicators that the economy remains near full employment. The Reserve Bank of Australia kept rates on hold last week and signaled that the next move out of the central bank is likely to be upwards. Increased risks to inflation have presented themselves in the economy, requiring the RBA to need more time to assess the persistence of the inflationary pressures. Household spending, monthly inflation, and private demand figures have all posted strong readings recently and are likely to stay elevated. Data from the National Australia Bank also showed that capacity utilization across the economy was at its highest level in 18 months, which will add to the RBA’s level of concern about the inflation outlook.

INTEREST RATE MARKET FUTURES

Yields have edged higher across the curve following November’s jobs report, which showed that hiring remained subdued and an uptick in the unemployment rate. For officials at the Fed, the uptick in the unemployment rate will be a talking point as it signals that the balance of labor demand and supply is changing. Questions as to what level of hiring the economy needed to maintain a stable unemployment rate given the reduction in labor supply has been a sticking point for members at the Fed. But November’s uptick in unemployment suggests that the level of hiring is below what is needed. Notably, gains in the healthcare sector have been carrying the weigh of recent payroll reports. Taking out the healthcare sector, it is likely the economy would be showing a net loss of jobs.

The spread between the two- and 10-year yields rose to 68.60 bps, while the two-year yield, which reflects short-term interest rate expectations, is little changed at 3.506%.

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