Investing.com – Market participants looked ahead to the publication of the last Employment Report of 2016 later on Friday in a release that could leave markets unmoved in a situation where full employment is already priced in and the focus has shifted to what incoming President Donald Trump could do for the economy and its corresponding effect on Federal Reserve (Fed) monetary policy.
The U.S. Labor Department will release its December nonfarm payrolls report at 8:30AM ET (13:30GMT).
The consensus forecast is that the data will show jobs growth of 175,000, following an increase of 178,000 in November. The slowdown would be in line with recent history as December job growth has eased when compared to the prior month for the last three years and occurred seven times out of the last ten.
The unemployment rate is forecast to inch up to 4.7% from 4.6%, but it should be kept in mind that November’s reading was an unexpected drop from the prior 4.9%, leading some experts to conclude that it may have been a statistical anomaly.
Though normally the two aforementioned data points are in the spotlight, recent considerations by Fed officials that the labor market is either at, or very close to, its goal of maximum employment, may take the wind out the data’s sails except in the case of a large miss or beat.
“I would say the labor market looks a lot like the way it did before the recession,” Fed chair Janet Yellen said at the December 14 press conference.
With this in mind, wage inflation could be a more important focal point in the December report. Average hourly earnings are expected to rise 0.3% after falling 0.1% a month earlier.
That brought the yearly rate down to 2.5% in November from its high at 2.8% in October. The reading is considered a key factor for the Fed as increased wage growth tends to correlate with upward inflationary pressure, increasing the probability that the central bank will need to tighten policy to keep prices under control.
In a twist to the norm, the minutes of the last Fed meeting released on Wednesday warned that "many participants judged that the risk of a sizable undershooting of the longer-run normal unemployment rate had increased somewhat and that the Committee might need to raise the federal funds rate more quickly.”
In other words, a reading that is “too positive” could spin markets on their head as it forces the Fed to consider the need to accelerate policy tightening in order to make sure the jobless rate returns to a higher level that is healthier for the economy from a long-term perspective.
In any case, the December report is widely expected to do little to change the market outlook for the future path of monetary policy as the data closes the door on 2016, especially in a context where the labor market is close to, if not already at, maximum employment.
Much more relevant will likely be Trump’s inauguration on January 20 and his posterior steps on implementing fiscal policies.
The speed of their implementation and their final impact on the overall economy is what the Fed itself will be watching in order to make future policy decisions.
In the minutes, Fed members emphasized the “considerable uncertainty” surrounding the upcoming fiscal policy changes.
They also revealed that about half the policymakers had factored in expectations in December that the incoming President would implement expansionary fiscal policies when they evaluated that there could be three rate hikes in 2017.
In other words, the other half of the committee is on hold to see how those policies play out and their effect will guide future rate hike timing.
For the moment, the market remains skeptical with only a 36.2% probability of a third hike coming this year, according to Investing.com’s Fed Rate Monitor Tool.