Friday marks the first on-time US NFP release since the shutdown began, allowing it to return to its market-moving position. The expectation is that the US job market will remain slack, which will justify further Fed easing. But there is a wide range of forecasts, which could lead to increased market volatility in the aftermath.

The main effect of the NFP release will likely be on expectations for the next Fed cut, which could trigger reactions across dollar pairs and gold. Ahead of the data release, markets are pricing in around a 50-50 chance of a March rate reduction. Depending on what the data shows, those odds could change fairly easily and move the markets substantially. Given the various data sets to be released, the market could react in different ways depending on the job numbers.
 

What Are the Consensus Forecasts for December NFP?

The headline December Non-Farm Payrolls is forecast at 60K, which is comparable to the 64K recorded in November. However, the total number of jobs created is often subject to significant revisions, which could affect the data’s interpretation. For example, if there is a small beat in the December number but a large downward revision to November, markets could view that as a negative in the balance. Additionally, the BLS regularly conducts revisions at the end of each quarter and the year, which could result in an overlarge representation in the birth/death adjustment.

The Fed focuses primarily on the unemployment rate, which uses a different statistical model. For this reason, it can move in a different direction than the NFP figure. US unemployment is projected to remain unchanged at 4.6% in December. If that were the case, it would break a 7-month trend in which the unemployment rate has ticked up by a decimal point each month.
 

Has the Labour Market Hit a Low?

Some analysts speculate that the December data could indicate that the US jobs market has bottomed and is about to recover. Some are even predicting an NFP number as high as 155K, arguing that increased holiday hiring could bolster the figure. However, even the most optimistic projections suggest that the job creation rate will remain below around 180K, the estimated replacement level.

With inflation still above the Fed’s target rate, further rate cuts will have to be justified by continued weakness in the jobs market. This sets up a “good news is bad news” scenario, where markets might stumble if NFP is above expectations, because it would mean the Fed is less likely to cut rates soon.
 

The Potential Market Reaction

Over the holidays, there have been few Fed speakers to update markets on the FOMC’s current thinking. This means the data could carry greater weight in the market reaction. Ahead of the NFP figures, markets have been treading water, a sign they may be waiting for Friday’s data to set direction.

The headline job creation number is likely more closely linked to risk sentiment, and signs of a recovery in the US economy could support more risk-taking. That could weigh on the dollar and gold. On the other hand, the unemployment rate is likely to affect the outlook for the Fed, meaning that if the jobless rate increases, the dollar could weaken but gold gain as traders anticipate more rate cuts.

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