December labor market report published today came out much stronger than expected despite the unexpected increase of the unemployment rate from 3.7% to 3.9%. The increase of the unemployment rate is due to an increase of the participation rate from 62.9% to 63.1%. Non-farm payrolls rose by 312k, much higher than the 177k projected by consensus, with November’s figure revised from 155k to 173k. Average earnings rose 0.4% m/m (consensus 0.3% m/m) and 3.2% y/y (consensus 3.0% y/y).
The data confirms that short-term outlook for the U.S. economy remains positive. However, being a laggard indicator, it does not change the perspective that economic growth could soften in mid-2019.
Anyway, we think that strong labor market report will increase the possibilities that inflation could be more resilient than previously projected in early 2019 despite the strong decline of oil prices. In this scenario, we expect the market to increase the possibilities of a further tightening of monetary policy in 2019. The Euro/Dollar futures are now assigning a lower than 50% possibility of a 25bp rate hike in 2019.