November Payrolls: A Key Test for the Fed’s Data-Driven Policy
While politics and the potential policy implications of Donald Trump’s anticipated return to the White House dominate headlines, market participants may soon face a reality check. This week’s labor-market data, culminating in Friday’s pivotal November jobs report, could significantly influence the Federal Reserve’s interest rate trajectory—and by extension, the financial markets.
“The market likely wants positive news, but not overly so,” said Brent Schutte, Chief Investment Officer at Northwestern Mutual Wealth Management Co. “An exceptionally strong jobs report might cast doubt on the Fed’s willingness to cut rates.”
Such doubts could be problematic for equity markets, which are already grappling with historically high valuations. Hopes for a sustained rally into 2025 rest, in part, on the assumption that Fed rate cuts will ease financial conditions. Higher rates, however, dampen the present value of future earnings, making lofty valuations harder to justify.
Lessons from History
Investors mindful of market history may find parallels to the dot-com bubble of the late 1990s. Nicholas Colas, co-founder of DataTrek Research, noted that the bubble burst in early 2000 after the Fed signaled a more hawkish stance, eventually raising rates to 6.5%. “Even a modest series of hikes was enough to cool investor exuberance,” Colas wrote, adding that such a scenario isn’t the base case this time, with DataTrek remaining optimistic on equities.
The Fed’s Rate-Cut Dilemma
Markets are betting on another 25-basis-point cut when the Federal Open Market Committee (FOMC) meets next month, following prior cuts in September and earlier this month, according to the CME FedWatch Tool. However, resilient economic data and stubborn inflation have some analysts pondering whether the Fed could pause its easing cycle.
Minutes from the Fed’s November meeting revealed ongoing uncertainty about the neutral interest rate—the level at which monetary policy neither stimulates nor restricts growth. Some officials called for a slower pace of cuts. Steve Blitz, Chief U.S. Economist at TS Lombard, emphasized the importance of the upcoming jobs data, writing, “While I believe they are still biased to cut, the November payroll report could prove critical for this data-dependent Fed.”
Market Momentum vs. Risks
Despite lingering uncertainties, markets have entered December with a tailwind. The S&P 500 logged its 53rd record close last week, gaining 26.5% year-to-date. The Dow Jones Industrial Average briefly surpassed 45,000, while the Nasdaq Composite saw a monthly gain of over 6%.
Bond markets also offered relief, with the 10-year Treasury yield retreating to its lowest level since October. However, some warn of complacency among investors. Economist Ed Yardeni pointed to record-high consumer confidence in stock gains as a potential contrarian signal, suggesting that markets could be due for a pullback.
The Bigger Picture
Beyond short-term fluctuations, the economic data and market moves reflect deeper dynamics. Lauren Goodwin, Chief Market Strategist at New York Life Investments, noted, “Markets care about real political change, not just politics. Durable trends are backed by broader economic themes.”
While optimism about potential tax cuts and deregulation is buoying sentiment, this week’s labor-market data could either reinforce or challenge the prevailing trends. As Paul Christopher of Wells Fargo Investment Institute observed, “The Trump trade aligns with existing economic and inflation trends.”
In this context, November’s jobs report may not just be another data point—it could be a decisive factor shaping market sentiment and the Fed’s path forward.
