Significant Layoff Warning Could Force New Thinking on a December Rate Cut
Fed speakers seem inclined to tread carefully.
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Thursday will bring the September Employment Report, which, if you’re looking at the calendar, you quickly realize it is quite a bit in the rearview mirror as we get ready for the Thanksgiving holiday next week.
Following the rebound in private sector job creation ADP (ADP) noted in October, Friday brings the Flash November PMI report from S&P Global. As we’ve been doing so in earnest over the last several months, we’ll be focusing on what this data says about job creation and inflation, as well as the overall tone of the larger economy.
Ahead of that report, there is reason to think we could see that October job creation noted by ADP soften again in the coming weeks. We’re thinking this is possible following data from the Federal Reserve Bank of Cleveland that shows 39,006 Americans last month in 21 states received a Worker Adjustment and Retraining Notification Act (WARN) notice informing them of an upcoming layoff. U.S. labor law requires employers to provide these written warnings 60 days ahead of plant closings or mass layoffs.
Those notices add another layer behind the bifurcated consumer we keep hearing about that has led companies to report modest comp sales growth of late. Given the 60-day timing of the WARN notices, the corresponding layoffs could start to show up in the weekly data being published by ADP as part of its Employment Change data set, as well as others, such as the Challenger Job Cuts report.
Where we’re going with this is, over the last month, we’ve seen December rate cut expectations slide to a 51.1% probability on Tuesday from almost 94% on October 17. That move later was kick-started by those sobering comments from Fed Chair Jay Powell, where he said a December rate cut was “far from certain.”
Absent much of the data we and the Fed chew through, we’ve heard multiple Fed speakers share that they are inclined to tread cautiously given the lack of data visibility and the number of rate cuts delivered so far in 2024 and 2025.
But it’s the comment from Richmond Fed President Thomas Barkin on Tuesday that sums up the current situation:
“When the lighthouse goes dark, you might remain on your preexisting path at first, but soon enough, you will want to throttle back until you get more visibility. That's not a particularly comfortable place to be, so I am looking forward to some illumination, from the data as it returns or from our outreach. You may notice that nothing I just said gives any guidance for our next meeting. That's intentional, as I think we have a lot to learn between now and then.”
We agree that there will be much data to dig into between now and the next Fed meeting, which culminates on December 10. That includes the November PMI figures from ISM, potentially a November Employment Report, and some of those WARN notices turning up in the weekly job data and Challenger’s November Job Cuts report. We’ll also want to keep tabs on WARN Notice data for November and December, and what they will say about layoffs starting in January and February.
Depending on the data, we could see those diminished December rate cut expectations rebound as the market digs through that data in early December. That would help the market recover some of the ground it lost in recent weeks, and it gives us another reason to closely follow the data.
