Out of the darkness and into the fog

Disinflation with an asterisk

The recent joint release of the October and November employment and inflation reports paint a complex picture of a U.S. labor market currently mired in technical distortions and "stall speed" growth. The delayed data has provided some answers on the labor market, but the underlying outlook remains murky. Nonfarm payrolls saw a significant 105,000 decline in October followed by a modest 64,000 gain in November, largely driven by a massive 162,000 drag from federal government payrolls linked to a deferred resignation program under DOGE. When excluding these government fluctuations, private sector growth remained weak, averaging only 61,000 per month. Consequently, the unemployment rate ticked up to 4.6%, though much of this increase is attributed to the government sector rather than a broad private-sector downturn.

On the inflation front, headline and core CPI slowed to 2.7% and 2.6% respectively, coming in well below expectations. However, these figures are heavily caveated by a federal government shutdown that prevented the collection of hand-priced data in October. This data gap likely artificially depressed shelter and core goods inflation readings, creating a downward bias that is expected to reverse in December. In the housing market, existing home sales edged up to an annualized 4.1 million units, and the median sales price remained flat.

Fed is in no rush to cut

While speaking on CNBC last Friday, John Williams struck a calm, steady tone. His message was simple: there’s no rush to cut again. After last week’s quarter-point reduction, he said policy is “in a pretty good place,” balancing support for a cooling labor market with progress on inflation. He emphasized that recent data are hard to read, distorted by technical issues following the 43-day government shutdown.

On inflation, Williams said the November CPI continued the disinflation trend, but incomplete data collection likely artificially lowered the print by about a tenth. On jobs, he argued hiring remains steady and that the uptick in unemployment was probably inflated by similar data quirks.

Looking ahead, Williams said rates are still mildly restrictive and could move lower over time as inflation reaches 2%, but January is a tough call. He also stressed that renewed Treasury bill purchases are technical liquidity operations, not quantitative easing.

The week ahead

While U.S. economic data has resumed flowing, many analysts describe the current environment as moving "out of the darkness and into the fog." This week, investors will navigate this uncertainty by parsing key indicators for signals on inflation and labor market health. The busy early-week schedule features industrial production, consumer confidence, and finalized Q3 GDP figures on Tuesday, followed by jobless claims on Wednesday. After the Christmas Day hiatus, the focus shifts to Saturday’s release of November retail sales to gauge the strength of the American consumer.