NFP Preview

The most important data release of 2026 so far will be announced later today at 1330 GMT. The US labour market report for December is a high stakes release that has the potential to trigger significant volatility as it will tell us whether the 75bps of US rate cuts since September was the right call from the government.

Below trend jobs growth expected

Economists surveyed by Bloomberg are expecting a reading of 70k, which is below the long run trend of 100k per month for US job creation, but is higher than the 64k November print. This data could still be impacted by the fallout from last year’s federal government shutdown. We will be watching out for revisions to the November data and to see whether the unemployment rate does fall to 4.5% as expected, as furloughed workers return to their government jobs in the final weeks of the year.

Earnings growth is expected to edge up slightly to 3.6% from 3.5%, and the participation rate could fall slightly to 62.4% from 62.5% in November.

 Mixed signals on strength of labour market

The economic backdrop to this report is mixed. The ISM service sector employment index rose to its highest level since last February. Initial jobless claims were also weaker than expected, and the JOLTS layoffs rate also dipped slightly to 1.1% from 1.2%. On the downside, JOLTS job openings were lower suggesting that companies could be reluctant to hire staff in this environment.

Hawkish surprise could weigh on markets

The mixed picture makes it hard to predict what last month’s NFP number will be, but there are some expectations that December was a strong month for hiring. Overall, a hawkish surprise and a reading above 85k would suggest that the US labour market is resilient and may not have needed the 75bps of Fed rate cuts last year. This could lead to a recalibration lower in interest rate expectations, currently the Fed Fund Futures market is pricing in 2 rate cuts for next year. It may also push up Treasury yields, which have been stable since the start of this year. Bond traders may pounce on a ‘strong labour market’ theme as they search for direction.

The ‘good news is bad news’ theme could also hit stock markets and lead to some risk aversion. Stocks could initially come under pressure if we get too good a number for payrolls, and this may hit interest rate-sensitive sectors like tech at the end of the week.

Stocks started the year on a high note although there was a mixed performance on Thursday as investors digested earnings news and some risk aversion started to creep into markets.

Dovish surprise could trigger rate cut recalibration

Conversely, a dovish surprise or a reading below 50k would suggest that the Fed is on the right path but may need to do even more to support the labour market. There will be a new Fed chair in May, picked by President Trump who is notoriously fond of rate cuts, so a weak NFP reading for December could give the Fed chair more ammunition to push the Fed for further cuts this year.

Stephen Miran, President Trump’s most recent Fed appointee, has said that the Fed will need to cut rates by ‘well over’ 100bps in 2026 to keep the economy moving forward, which is more than double what the market currently expects. If we get a weaker than expected NFP reading, the Fed Fund Futures market may start to converge towards Stehpen Miran’s view on rate cuts.

This could boost stock markets in the short term, as the market cheers the prospect of even loser monetary policy in the coming months. However, it could weigh on the dollar, which has had a strong start to the year and is second best performer in the G10 FX space so far this year.

The dollar view

After heavy selling of the dollar last year, the  greenback is still looking oversold, so an upside surprise for payrolls later today could trigger a big reaction in the dollar. The dollar index recently broke above its 200-day sma, which suggests that the medium-term outlook is bullish for the greenback. A strong report could see this pair first test the key psychological level of 100.00.

Chart 1: US dollar index 12-month chart

Source; XTB and Bloomberg