Wall Street is expecting a mediocre December jobs report, consistent with modestly slowing payroll gains and a steady unemployment rate. A meaningful surprise to either the upside or downside could shift the outlook for Federal Reserve rate cuts and jolt the S&P 500 out of its recent trading range.

Fed Chairman Jerome Powell  described the job market as “clearly still cooling further,” but not in a concerning way, after the U.S. central bank cut its key interest rate on Dec. 18. The question for today is whether that still appears to be the case, though one month’s data that’s subject to revision can’t be relied on too heavily.

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Jobs Report Expectations

Economists expect the December jobs report to show that employers added 157,000 nonfarm payroll jobs last month, including 130,000 in the private sector, according to the Econoday consensus forecast. Projections for overall employment gains range from 110,000 to 185,000.

The unemployment rate is expected to hold steady at 4.2%, though some forecasters are predicting 4.3%.

Average hourly earnings are forecast to rise 0.3% on the month and a steady 4% from a year ago.

Fed Rate-Cut Outlook

Ahead of the monthly jobs report, markets are pricing in 7% odds of a rate cut at the Jan. 29 Fed meeting, according to CME Group’s FedWatch tool. Those odds rise 40% for the March 19 meeting and 52.5% for the May 7 meeting.

For the full year, markets see a slightly greater likelihood of 50 basis points in rate cuts (51%) than of just 25 basis points in cuts (49%).

Fed Policy Considerations

At least one further Fed rate cut is expected because policymakers still see their current interest-rate setting as restrictive, meaning it is acting as a brake on economic growth. The Fed aims to lift its foot off the brake to get to a neutral level before tight policy unnecessarily weakens the labor market.

Yet after cutting its key rate by 100 basis points since September, Powell said after the Dec. 18 meeting that the Fed is in a new phase: “We’re going to be cautious about further cuts.”

After that Fed meeting, Powell noted that the labor market was still cooling and that the Fed was still confident that inflation, though on a bumpy path, was trending toward 2%. Any deviation from that status quo would prompt a market reaction.

Since Dec. 18, market-based interest rates have moved substantially higher, with the 10-year Treasury yield rising to around 4.6% for the first time since last May. That’s contributed to a tightening of financial conditions, which weighs on economic growth and may influence Fed policy.

However, the elephant in the room is President-elect Donald Trump’s policy agenda, including tax cuts, deregulation, tariffs and deportations. Many economists think those policies could contribute to higher inflation this year, working against further Fed rate cuts.

S&P 500

S&P 500 futures dipped 0.2% ahead of the jobs report in early Friday stock market action. Stocks were pressured by the rising 10-year Treasury yield, which edged up to 4.69%. Tesla (TSLA), Constellation Energy (CEG) and Delta Air Lines (DAL) were early S&P 500 on news.

The S&P 500 rose 0.2% on Wednesday, before being closed on Thursday, finishing 2.8% off its Dec. 6 record closing high.

Be sure to read IBD’s The Big Picture column after each trading day to get the latest on the prevailing stock market trend and what it means for your trading decisions.

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