Make Mine Vanilla: Dull Jobs Report Might Be Just What's Needed After Wild Week

After a crazy week on Wall Street, a vanilla jobs report might be just what the doctor ordered. That’s what the government delivered Friday morning. 

U.S. job creation stepped back slightly in November, coming in a bit below expectations at 155,000. That’s less than the 195,000 predicted by Wall Street analysts, but still a decent showing that seems to indicate a growing economy. Wages rose 3.1 percent year-over-year, the same as in October, in line with analysts’ estimates and not likely to stoke any additional inflation fears.

Basically, it looks like the perfect jobs report for this week. It’s probably not going to make a lot of news, and by falling short of expectations on job growth, it seems unlikely to shake up the volatile bond market. This week, the market could use some “beige” news, and this report was “beige” in just about every sense of the word.

Stocks, which had been down moderately in pre-market trading before the report, started to come back a bit after the data, maybe on ideas that weaker than expected jobs growth was another sign that the economy may not be overheating.

Slicing and Dicing the Unemployment Report

The wage rise was in line with analyst expectations, and the second month in a row with a “3” as the first number after a decade of pay growth below that. While inflation remains subdued by almost every measure, this number might get some extra scrutiny on ideas that higher wages can sometimes filter through to prices. Next week’s U.S. inflation data might be worth a close check.

From an industry standpoint, health care led all job gains in November with 32,000, continuing a strong year for that sector. Professional and business services also saw 32,000 new jobs, and manufacturing had 27,000 jobs added. Manufacturing employment has increased by 288,000 over the year, largely in durable goods industries, the Department of Labor said. Next was transportation and warehousing, with growth of 25,000.

Overall job growth was down from a revised 237,000 in October, the government said. If you think back to October’s report, the leisure and hospitality sector had huge gains, but the government said that was related to recovery after the late-summer hurricanes. There wasn’t any major change in that category this time out.

Labor force participation also didn’t change, staying at 62.9 percent. That figure has hardly budged over the last two years. Back in 2000, it peaked at just above 67 percent.

To sum things up, the report was mostly in line with expectations, except for the headline number being a bit lower than expected. Job growth is averaging 170,000 over the last three months, pretty much in the sweet spot for the economy, meaning not enough job creation to spark economic overheating that might persuade the Fed that more rate tightening is needed, but not too low to keep the economy from growing, either. There’s arguably nothing in the data today to shake widespread belief in the likelihood of a Fed rate hike later this month followed perhaps by a pause in early 2019 while the Fed watches more data roll in.

Comeback Thursday on Wall Street

Ideas that the Fed might be ready to hit the pause button on rate hikes seemed instrumental in Thursday’s huge market reversal. The Dow Jones Industrial Average ($DJI) ended up falling less than 0.5 percent after being down 780 points early in the session, while the Nasdaq (COMP) actually rose moderately as some of the FAANG stocks found buyers.

With only about an hour left in Thursday’s session, The Wall Street Journal reported that Fed officials are considering whether to signal a new wait-and-see mentality after a likely interest-rate increase later this month, which could slow down the pace of rate increases next year. At this point, the futures market has already built in just one rate hike in 2019, but the last “dot plot” from the Fed signaled as many as three. 

The next dot plot comes Dec. 19 when the Federal Open Market Committee (FOMC) wraps up its final meeting of the year. That date is looking more and more interesting as the Fed keeps sending market-friendly signals. Fed Chairman Jerome Powell’s press conference and the dot plot could get even more attention than usual.

Fed Speakers Send Reassuring Tone

That Wall Street Journal article wasn’t the first sign Thursday of more potential Fed dovishness. Two Fed speakers made comments early in the day that might have reassured investors who’d been worried that the Fed could be hiking into a slowing economy. Atlanta Fed President Raphael Bostic said the current Fed funds rate is “within shouting distance” of neutral. He added he’s not seeing “clear signs” of overheating or weakening in the economy, but noted that inflation seems to have “softened” over the last three months, media reports said. 

Another Fed speaker, Dallas Fed President Robert Kaplan, said Thursday that the Fed should be “patient” in its actions amid the headwind of slowing global growth. Powell himself spoke at an event last night, noting that the economy remains strong.

With this morning’s release factored in, chances of a Fed rate hike later this month ticked up to near 80 percent, according to CME Group futures. That’s still pretty high odds, so it still seems likely to happen. Chances of a follow-up March hike have sunk to around 27 percent, futures prices indicate, and a hike by June looks like a 45 percent probability.

Seeking Havens?

Even though Thursday saw a big turn-around with stocks charging back from steep early losses, investors continued to pile into so-called “safe haven” products. The 10-year U.S. Treasury yield, which traded above 3 percent as recently as the start of this week, fell to as low as 2.82 percent before recovering a bit to 2.88 percent by the end of the day. 

The two-year yield fell sharply as well, keeping the gap between the two about even with where it’s been so far this week at around 13 basis points. An inversion of the three-and five-year yields earlier this week helped get the caution flags waving, as historically there’s an association between yield inversions and recessions.

Financials, Energy Share the Burden

While the market recovered a lot of by the end of the session, it was still a rough day for some sectors. Financials continued to struggle amid rate worries (see below) while the energy sector deals with a crude market that just can’t seem to rally. Both sectors ended down more than 1 percent. Financials took additional pressure from Citigroup inc. C, which fell sharply after its CFO said the bank no longer expects year-over-year revenue growth for its markets business in Q4, Briefing.com noted. In addition, C expects to fall slightly short of its stated goal of achieving 100 basis points of improvement in year-over-year operating efficiency.

On a more positive note, some of the FAANG stocks came back from their early lows, and home building stocks also found some buying interest late in the session. One thought is that lower yields could mean lower mortgage rates, maybe giving the moribund home building sector a boost. Real estate topped the sector leaderboard Thursday. Other sectors with gains included communication services, which was helped by a jump in Facebook, Inc. FB shares; info tech, and consumer discretionary. Some of these were among the most beaten-down areas earlier this week.

The initial pressure Thursday came after the arrest of a top executive at Chinese tech giant Huawei at the request of the U.S. government. This angered Beijing and raised concerns about next steps in trade negotiations between the two countries. Though the Fed news kind of washed away some of the early fears around this, it’s possible we might see continued pressure in coming days if there’s no resolution or if China retaliates.

As a note, Boeing Co. BA continues to look like a bellwether when it comes to reading the stock market’s reaction to China news. At one point early Thursday, shares of BA accounted for a full one-third of the $DJI’s losses as stocks slid on news of the Chinese executive’s arrest. This and other multinational names could continue to be volatile.

Speaking of volatility, the VIX jumped early Thursday but calmed down by day’s end. It’s still elevated at 21, but not historically too high.

Sweating LULU’s Earnings and Waiting For OPEC

In post-closing bell earnings news, LuLuLemon Atheletica Inc. LULU beat Wall Street analysts’ earnings and revenue estimates. Still, shares fell 3 percent in post-market trading because it seems some investors weren’t wild about the apparel firm’s Q4 outlook. As we’ve discussed many times, this seems to be a continuing theme for earnings in 2018. Investors keep punishing companies for what they say they’re going to do instead of rewarding them for what they did. 

There was more earnings news early Friday. Shares of Broadcom Inc. AVGO shot up more than 3 percent in pre-market trading after the company beat analyst estimates and provided a stronger-than-expected outlook.

Over in the oil patch, crude fell back toward recent lows near $51 a barrel Thursday as the first day of OPEC’s meeting ended with no agreement on production cuts. It then rose above $52 early Friday on hopes Russia might reduce output. It’s still unclear, however, if a deal can be reached, media reports said.

Some oil market analysts say there needs to be a cut of one million barrels a day more to put the brakes on this sell-off, and that failure to agree by Friday could set crude up for a test of $40 a barrel. The question is whether Saudi Arabia and Russia (not an OPEC member) can come to an agreement on how much to cut and who’s going to do the cutting. Also, keep in mind that if the cut is off of November levels, that might not be too constructive for the oil market when you consider November production was at all-time highs.

Figure 1: Volatile Week for Indices. This week's volatility seems evident in the chart above, which plot's the 1700-point range in the Dow Jones Industrial Average ($DJI - candlestick) versus the Cboe Volatility Index (VIX - purple line), which saw a 10-handle range in just 3 trading days. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Change in Mood?

When you compare the track record of Treasury yields recently vs. earlier in Q4, it might be easier to argue that what we’re seeing now is a true “risk-off” kind of trade, some analysts say. The 10-year yield actually rose about 10 basis points in October (from 3.06 to 3.16 percent, approximately), even while the S&P 500 Index (SPX) fell about 7 percent. That might have signaled that the sell-off in stocks didn’t really draw many investors toward the relative “safety” of fixed income.

Over the last month, on the other hand, the SPX has fallen about 5 percent (through midday Thursday) and the 10-year yield was down about 10 percent. That’s a very different kind of scenario, and it’s a trend starting to show up in some other “defensive” havens as well, like gold. The dollar, too, remains near recent peaks. We’ve also seen some stocks like PepsiCo, Inc. PEP, Procter & Gamble Co. PG and The CocaCola Co. KO drawing investor money as more people seem attracted to blue chip dividend payers. The health care sector (outside of biotech) has been another beneficiary of this type of action.

In the past, investors flocking toward “safe havens” has sometimes—though not always— turned out bearish for stocks, so this “risk-off” trade might deserve careful monitoring over coming days. Even if stocks build on Thursday’s late recovery, it might be prudent to keep an eye on the fixed income and gold markets for clues about the overall mood.

Discretionary Check

One of the worst-performing sectors over the last three months is consumer discretionary, down nearly 10 percent over that period. Many investors appear worried that a possible economic slowdown might be bad news for major retailers, it seems. However, it’s probably not a good idea to discount an entire sector, in part because each company has its own story. That’s especially true in consumer discretionary, where some stores have done a far better job than others adjusting to the new landscape where online sales have shifted the foundations. That’s especially true if you’re thinking about buying a consumer discretionary stock based on your earnings expectations, as few sectors have as much variation in quarterly performance. 

When you’re looking at earnings in consumer discretionary, think of it as hand-to-hand combat. You have to really be selective and do your research. Two further things to keep in mind about the sector: First, the U.S. consumer still appears pretty healthy, based on holiday sales so far. Second, individual stocks in the sector can move wildly from year to year, sometimes as a result of falling out of favor with consumers by not keeping up with current fashion, or by revamping their stores.

Out of Region

Though big bank stocks often hog the attention, it’s regional banks that seem to have really taken it on the chin from declining yields and the narrowing curve. Earlier this year, the regionals had seen some investor interest as some of the major banks got hit by trade fears. The thinking then appeared to be that regional banks might not be exposed so much to international trade issues. That was then. Now the yield curve seems to be taking a toll on everyone, with regional banks down nearly 6 percent so far this month (through midday Thursday) but the financial sector as a whole was down only about 4 percent, according to S&P Dow Jones Indices. This kind of pressure on financials wouldn’t be too surprising to see rolling into the new year, unless yields get some kind of bounce. Financials are down more than 7 percent year-to-date, making them one of the worst sector performers of 2018.

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