Here comes another nonfarm payroll night! Employment may "rebound moderately"—is there still a chance for a rate cut in January?

Wall Street is holding its breath ahead of the release of the US December non-farm payrolls report at 21:30 Beijing time tonight. The market is eager to find clues about the future policy path from this data, especially whether the “moderate rebound” in the employment market is sufficient to support the Federal Reserve in pausing rate cuts in January.

The current market consensus shows that the number of new non-farm jobs in December is expected to be between 70,000 and 75,000, a slight increase from November’s 64,000. Although the growth in new jobs is not strong, it is enough to ease fears of a sharp economic downturn. This “moderate rebound” means the labor market features “slower hiring but no wave of layoffs.”

However, regarding the January rate-cut outlook that investors care about most, the unemployment rate reading will play a decisive role. According to recent reports from Morgan Stanley and Goldman Sachs, there is a possibility that the unemployment rate will fall to 4.5%. If this forecast comes true, it may increase the likelihood that the Fed will hold rates steady in January. Conversely, if the unemployment rate stays at 4.6% or higher, it would support a January rate cut. Current money market pricing shows an 80% chance that the Fed will keep rates unchanged in January, while the probability of a further 25-basis-point cut by March is about 48%.

This data release comes at a policy-sensitive time. Although data shows GDP growth remains strong, hiring activity is relatively sluggish. Market analysis points out that if new jobs fall in the 0 to 105,000 range, stocks might react positively, seeing it as evidence of a “soft landing”; but if the data unexpectedly turns negative or far exceeds expectations, it could trigger sharp market swings. Tonight’s report will not only recalibrate the market’s perception of US economic resilience, but will also directly determine investors’ expectations for the monetary policy environment at the start of 2026.

Employment Data Outlook: Moderate Rebound and Potential Disturbances

According to consensus forecasts compiled by Bloomberg and other media, December non-farm payrolls are expected to increase by 70,000, and private sector jobs by 75,000, slightly higher than the previous reading of 69,000. Forecasts range from a low of 23,000 to a high of 155,000, and notably, no institutions expect negative growth.

The Goldman Sachs Ronnie Walker team predicted in a report released on the 8th that the number of new jobs will be 70,000, consistent with market consensus. Their analysis points out that big data indicators show moderate private sector job growth, and a shift in holiday retail hiring into December may provide a boost of about 15,000 jobs. However, there are negative factors: the ongoing federal government hiring freeze is expected to reduce government jobs by 5,000; and cold weather and snow early in the survey period may drag down construction and leisure/hospitality by about 20,000 jobs.

The Morgan Stanley team led by Michael T Gapen gave a slightly optimistic forecast of 75,000 jobs in their report on the 7th. Their economists believe that although hiring has slowed compared to last year, there are no signs of accelerating layoffs, and the labor market’s current feature is “slow hiring but no layoffs.” Also, the previously released ADP employment report shows that private sector payrolls rose by 41,000 in December, slightly below expectations, but after job losses in small businesses in November, hiring has resumed.

Unemployment Rate and the "Perceived" Labor Market Cooldown

The market generally expects the December unemployment rate to fall from 4.6% to 4.5%. Goldman Sachs notes that the November unemployment rate was actually 4.56%, so the downward revision to the 4.5% threshold is not difficult. In addition, with temporary federal workers returning to their jobs and a slight decline in continuing unemployment benefit claims, the unemployment rate is likely to stabilize.

The Citi Andrew Hollenhorst team forecasts that the US unemployment rate in December could rise to 4.7%, prompting the Fed to cut rates by 25 basis points this month. Balancing the risks of a weakening labor market and cooling inflation, the baseline forecast for actual rate cuts this year is 75 basis points, with a possibility of over 100 basis points.

However, beneath the surface unemployment data there are undercurrents. Pantheon Macroeconomics warns that broader labor market slack is emerging. New graduates are finding it hard to get jobs, and former federal employees who accepted voluntary buyouts often aren’t eligible for unemployment benefits, which could mean that continuing claims may be underestimated.

Consumer confidence surveys also confirm labor market weakness. The Conference Board’s December survey shows that respondents saying “jobs are plentiful” fell from 28.2% to 26.7%, while those saying “jobs are hard to get” rose. This indicates that although overall data appears stable, ordinary people are feeling the labor market cooling.

Policy Game: Pause or Continue in January?

The Fed cut rates by 25 basis points in December last year to the 3.50-3.75% range. Powell said then that although the layoff rate is low, labor demand is clearly weak. The latest FOMC minutes show internal divisions among policymakers: most participants support rate cuts to respond to employment downside risks, while some favor keeping rates unchanged to assess the lagged effects of policy.

For the January policy meeting, this jobs report will be decisive. Barclays analysis believes the minutes suggest the Fed may pause rate cuts in January to observe the effects of previous cuts. Morgan Stanley holds a different view; its economists believe that if unemployment stays at 4.6% (rather than the consensus 4.5%), the Fed still has sufficient reason to cut rates in January.

Current market pricing leans towards “pause.” If employment data is unexpectedly strong, it will further reduce the chances of near-term rate cuts and may reignite concerns about inflation pressure; conversely, if data is much weaker, it may force the Fed to reconsider its hawkish stance.

Market Reaction and Strategy Views

Wall Street’s major trading desks are braced for tonight’s data release. Options market pricing indicates that the S&P 500’s potential volatility on the day of the data release is about 1.2%.

JPMorgan’s market intelligence team, through scenario analysis, points out that the most favorable outcome for equities is job growth between 0 and 105,000, regarded as the “Goldilocks” zone. Breakdown as follows:

75,000-100,000: S&P 500 rises 0.25%-1%;35,000-75,000: S&P 500 rises 0.25%-0.75%;Above 105,000: Stocks may fall 0.5%-1%, as strong data could push up bond yields and dampen rate-cut expectations;Below 0: Stocks may fall 0.5%-1.25% as recession fears rise.

Goldman Sachs’s trading division believes that as long as the labor market remains steady, combined with economic growth above consensus and the Fed’s dovish tilt, it forms a favorable macro backdrop for US stocks. However, they also caution that with current stock valuations high, the market remains vulnerable to extremely weak labor data. Defensive sectors such as healthcare and consumer staples currently have relatively low valuations and may become havens for risk-averse capital.

In foreign exchange, Goldman strategist Karen Fishman notes that if data meets expectations and the unemployment rate drops to 4.5%, it would be an ideal combination for cyclical assets, benefiting high-beta currencies like the Australian dollar, while the yen may underperform due to rising yields.

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