• US’s November unemployment rate slipped unexpectedly

• We highlighted our concern on US’s strong job market before

• Investors are lowering their expectation on FFR level next year

• Cautious mode on: US’s CPI and policy meeting announcement next week

Investors initially bet that US FOMC may cut the FFR by as much as 150 bps next year only to be doused by the latest development following the release of US’s November labour market condition. Note that US’s November unemployment rate slipped unexpectedly to 3.7% versus 3.9% in October and this is a concern. We have raised our worry before that unemployment and inflation rate in US could disappoint following the strong US’s labour market condition where job openings are almost 1x more than the pre COVID level. Having said that, US’s JOLTS touched 8.7mn in October, against 9.5mn in September, close to 1x higher compared to pre- COVID period. Therefore, next week’s release of US’s November CPI numbers and policy decision will be closely watched. The ramification of the stronger-than-expected US’s labour market could be wide ranging amid US’s central bank that could re-use the term ‘longer-for-higher’. With that, the expected cut in US’s FFR could be smaller-than-speculated and later-than-expected. From the initial bullish expectation of as high as 150 bps cut in FFR as early as March, we think that investors may lower their expectation. Our projection of 100 bps cut in FRR starting in July remain unchanged.

Based on Philip Curve theory, we think that US’s labour market needs to cool down convincingly and on this score, job openings need to slowdown markedly to historical average or close to historical average. However, the contrast could be happening as the slowdown is snail pace and that is a worry. The slowdown will be added by tepid energy prices and strong USD which could push a resilient private consumption activity and as such, inflation. Given this, US central bank needs to be cautious and not hasty in normalizing the US’s policy rate as that could risk inflation to rebound. Therefore, the discipline to engage a ‘data dependent strategy’ without caving in to market pressure. Note that US’s equity market is close to reaching historical high last Friday as investors were betting that US central back will make the historic cut in US policy rate as early as in March. That was before the release of US labour market condition for November however. As for next week, all eyes will be glued to Tuesday and Thursday where US central bank will release November CPI numbers and the final policy decision of the year. Consensus projects US’s November CPI to moderate slightly to 3.1% against 3.2% the month. The latest development on US labour market suggests that US November CPI could surprise on the downside however. Positively, consensus is expecting a status quo on US’s policy rate. That said, US’s FFR is set to remain unchanged at 5.50%. The outcome of these two announcements may shape the window dressing activity in December. It could either make or break sentiment.

Source: BIMB Securities Research - 10 Dec 2023