U.S. Employment: The Latest "Three Major Mysteries"

The non-farm payrolls seem to have lost their "deterrent power" again, as last night stocks, bonds, and currencies found reasons to rise from the unexpectedly strong data. The non-farm data continues this year's characteristic of ups and downs and "mutual competition": In November, non-farm employment increased by 227,000, higher than Bloomberg's consensus expectation of 220,000; the unemployment rate is 4.2%, but higher than the expected value and the previous value of 4.1%.

The market's interpretation relies more on the current mindset and expectations. From last night's market performance, the market's perception still focuses on stable economy, employment, and the Federal Reserve's "wait and see" after a rate cut: One hour after the data was released, the 10Y and 2Y U.S. Treasury yields fell by 5.3bp and 14.3bp respectively, and the market's expectation of a rate cut in December rose from 67% to 85%.

The seemingly strong non-farm employment has instead made a rate cut "more stable," with U.S. stocks and bonds both rising, behind which are three major "mysteries":

First, the unemployment rate rose more than expected. After retaining four decimal places, the unemployment rate in November rose for the second consecutive month to 4.2457%. The main driving factors for the rise in the unemployment rate this month are new entrants to the labor market and permanent job losers, while temporary unemployment has decreased, reflecting the return of temporary workers to their jobs after the hurricanes and strikes ended.

Second, although non-farm employment was higher than expected, the trend is still slowing down. The disturbances from hurricanes and strikes in October boosted the new employment in November after the "cold shock" in October. The six-month moving average of new employment in the private sector is 108,000, marking a decline for the sixth consecutive month, reaching a post-pandemic low.

The structure of new non-farm employment is not good. By industry, education and healthcare, as well as government sectors continue to make significant contributions: the two combined added 112,000 jobs, accounting for 49% of the total new employment. The private sector added 194,000 jobs, lower than the market expectation of 205,000.

The leisure and hospitality industry, professional and business services, and manufacturing performed relatively well, while other industries showed lackluster performance. Employment in leisure and hospitality may be related to Thanksgiving and "Black Friday" in November; manufacturing employment rebounded after a sharp decline in October, reflecting the return of workers to their jobs after the hurricanes and strikes ended.

Third, although wage growth exceeded expectations, it is not enough to raise inflation concerns. The non-farm wage growth in November was 4.0%, unchanged from the previous value and higher than the market expectation of 3.9%. The increase in wage growth mainly came from the mining, wholesale, and retail industries. Among the 13 industries, 6 saw wage growth increase, while 7 experienced a decline in growth

The probability of a rate cut in December rises to 85%, and expectations for rate cuts in 2025 remain largely unchanged. On the day the non-farm data was released, the S&P 500 and Nasdaq closed at historic highs, gold rose, and 10Y and 2Y U.S. Treasury yields fell. Market expectations for a rate cut in December have risen to 85%, while the expectation for rate cuts throughout 2025 remains at 2.6 times (25 basis points each). Whether a rate cut can be smoothly implemented in December depends on next week's CPI data: Current Bloomberg consensus expects a month-on-month increase of +0.3%. If this exceeds expectations, it may trigger a slowdown in the pace of rate cuts.

Looking ahead to 2025, Trump's policies may be a key variable for employment data. Although it is challenging to deport undocumented immigrants within the country, the tightening of immigration and border control policies is very clear. Net immigration inflow is an important force in the U.S. labor market, and deporting immigrants will exacerbate labor shortages, especially in service industries such as tourism, hospitality, and transportation, where illegal immigrants account for a high proportion.

Next year's non-farm employment and unemployment rate data may diverge: It is expected that next year's non-farm payroll growth may trend downward. In the first 11 months of this year, the average monthly increase in non-farm employment was 180,000, which may drop to below 150,000 per month next year; meanwhile, the unemployment rate is expected to remain stable, staying below 4.5%.

Under this expectation, we anticipate that the probability of the Federal Reserve pausing rate cuts in the second half of 2025 will increase. With the unemployment rate remaining low and inflationary pressures easing, the Federal Reserve may still implement 2-3 rate cuts next year, pausing in the second half.

Risk warning: Overseas monetary policy exceeding expectations, Trump's policies exceeding expectations, geopolitical factors exceeding expectations.

Author of this article: Mingnan Pei from Minsheng Macro, Source: ChuanYue Global Macro (ID:gh_fa80a5ed2401), Original title: "U.S. Employment: The Latest 'Three Major Mysteries'"

Report written by: Mingnan Pei SAC Number S0100524080002

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