The jobs report was likely distorted and there's plenty of room for the Fed to taper rate rate hikes and pause in the first quarter of 2023, JPMorgan Asset Management chief strategist says

• November's strong jobs report was likely distorted, and the Fed still has room to slow and eventually pause rate hikes.
• JPMorgan Asset Management's David Kelly pointed to possible exaggerations in the Friday's report.

The November jobs report was likely distorted, and there's plenty of room for the Federal Reserve to taper rate hikes and pause them in the first quarter of 2023, according to JPMorgan Asset Management chief strategist David Kelly.

"I think beneath the surface there is more weakness here," Kelly said in an interview with CNBC on Friday, adding that figures in the report may not be as strong as they appear on the surface. The US added another 263,000 jobs last month, and average hourly wages jumped 5.1% from a year ago. Meanwhile, the unemployment rate remained steady at 3.7%.

Those are signs that the labor market is still hot – the opposite of what the Fed is looking for after hiking rates by nearly 400-basis-points this year. Powell has pointed to a strong labor market as a major reason why the Fed should stay the course with its aggressive tightening regime, although he recently signaled the central bank could slow its pace to a 50-basis-point increase in December.

But it's possible the jobs market figures are distorted due to the way data is recorded in the report, Kelly said.

"When you are at a turning point in the economy, it tends to overestimate the number of firms that are actually in existence, and therefore, overestimate payroll job gains," he said, noting there was evidence that payrolls have actually declined in sectors like manufacturing and construction even as the report showed an increase.

Wage gains could also be exaggerated due to shortened workweeks in November, on account of factors like bad weather and workers falling ill, he said.

"When I look at the overall mosaic of what's going on in the jobs market, I think it's still moderating here, and I think the Federal Reserve will ultimately have plenty of excuse to taper down the rate hikes and pause them in the first quarter of next year," he said.

That's contrary to what some analysts have suggested, noting that a stronger-than-expected jobs market will pressure the central bank to keep tightening for longer in order to get inflation under control. The strong jobs data caused stocks to slip this morning as investors worried the Fed could stay aggressive with its monetary policy. Still, fed fund futures are showing a higher likelihood that this month's rate hike is smaller, with traders putting the odds of a 50 basis-point move at about 75%.