The upcoming December nonfarm payrolls report, due Friday at 12:30 GMT (08:30 ET), is shaping up to be a critical moment for markets. Here’s what you need to know ahead of the release, including forecasts, key data points, and the potential impact on Federal Reserve policy.

Headline Numbers to Watch:

• Nonfarm Payrolls: Expected at 163,000 jobs (down from November’s 227,000).
• Unemployment Rate: Forecast to hold steady at 4.2%.
• Average Hourly Earnings: Predicted to rise by 0.3%, a slight deceleration from recent months.

If the forecast proves accurate, December’s job creation will mark the weakest performance for the month since 2022, when 136,000 jobs were added. This could signal a continued cooling in the labor market, aligning with broader economic trends as 2025 begins.

Shortened Trading Week Raises Volatility Risks

With US markets closed on Thursday to honor the state funeral of former President Jimmy Carter, investors face less time to position themselves ahead of Friday’s report. This compressed timeline could heighten market volatility, particularly as traders assess the implications for Federal Reserve policy.

Unemployment Steady, Wages Still Growing

The unemployment rate is expected to remain unchanged at 4.2%, a figure that has held relatively steady throughout the second half of last year. Meanwhile, wage growth is expected to moderate slightly, with average hourly earnings forecast to rise by 0.3%, compared to 0.4% in the previous four months. This deceleration comes as earnings growth continues to outpace inflation, supporting consumer spending power.

Implications for the Federal Reserve

The December jobs report could influence the Federal Reserve’s next moves on interest rate policy. After cutting rates by 0.25% in December to a target range of 4.25%–4.5%, the Fed surprised markets by signaling a more conservative path for 2025, with only two rate cuts projected.

A weaker-than-expected jobs report on Friday might prompt the Fed to reassess this timetable, particularly if it indicates a slowdown in labor market resilience. The minutes from the December FOMC meeting, released earlier this week, showed broad support for continuing rate cuts but at a measured pace.

Marc Giannoni of Barclays observed, “The FOMC participants expressed broad support for proceeding with additional rate cuts, but at a slower pace.” Fed governors have reiterated this cautious stance, with Governor Kugler emphasizing the need to maintain current unemployment levels while tackling inflation that remains above the 2% target.

Market Expectations and the Path Ahead

The CME’s FedWatch tool shows a 95% probability that the Fed will hold rates steady at its next meeting on January 28–29. However, the tone of Friday’s data could shift market sentiment.

“We retain our baseline expectation that the FOMC will deliver two 25bp cuts this year, in March and June, in the face of slowing economic growth and gradually moderating inflation in H1 25,” added Giannoni.

Friday’s jobs report is poised to be a pivotal data release, with potential ripple effects on market expectations, Federal Reserve policy, and broader economic sentiment. With markets already on edge, any surprises in the data could amplify volatility and shape the economic narrative as 2025 progresses.