Hot Jobs Number Chills Stocks, Boosts Yields as the Fed Appears to Have More Work Ahead

(Friday Market Open) With the jobs market still sizzling, it looks like the Federal Reserve might have to hand out more ice.

The U.S. economy added 263,000 jobs in November and wages rose 0.6% month-over-month, both well above expectations and signs that the jobs market isn’t being held back by higher interest rates. Unemployment was unchanged at 3.7%. Treasury yields advanced and stock futures declined more than 1% on after release of the monthly jobs report by the Department of Labor.

While no one wants to see anyone lose their jobs, bullish stock market investors had hoped that the employment situation would cool off, easing pressure on wage growth and inflation. Today’s report showed pretty much the opposite. Notably, workforce participation remained weak at 62.1%. A higher number might have indicated more people getting back into the job market and a possible slowdown in wage levels that are driving inflation, which is at a four-decade high.

That didn’t happen.

Analysts had expected jobs growth of around 200,000 after October’s upwardly-revised 284,000 gain. Wages had been expected to grow 0.3%, down from a revised 0.5% figure in October. Instead, wages kept rising, up 5.1% over the last year. That’s good news for workers, but likely bad news for inflation.

Earlier this week, Fed Chairman Jerome Powell said wage growth is a good thing, but it still needs to ease or prices for services won’t come down. He noted that everything from haircuts to health care costs keep climbing, in part due to wage pressure. The big obstacle to getting wage growth to level off, he added, is a shortage of workers, according to a report in Politico. The labor force participation number today doesn’t show much promise in that particular category.

Jobs growth wasn’t limited to any single category in November. It was strong all around, according to the Labor Department. Leisure and Hospitality jobs growth led all categories with growth of 88,000, followed by health care at 45,000 and government at 42,000. The construction sector added 20,000 jobs, and manufacturing added 14,000. Those last two are categories you frequently see decline when the economy comes under pressure.

There were a couple of notable category declines. Retail jobs fell 30,000 and transportation and warehousing fell 15,000.

The report could put pressure on the Fed. Before the announcement, investors had put odds of a 50-basis-point rate hike later this month at around 78%, according to the CME’s FedWatch Tool. That declined quickly to 69% after the jobs data, with the futures market now dialing in more than a 30% chance that the Fed has to hike rates 75 basis points once again when it meets December 13-14. Keep an eye on that indicator in coming days.

One other Fed consideration is where the “terminal,” or peak, interest rate will be. The Fed’s next dot-plot, its quarterly projection of future rate levels, is due December 14. If the terminal rate grows significantly from the last report’s median of 4.6% and wage and jobs pressure continue, the road to the terminal rate could take longer if the Fed actually remains committed to slower hikes as Powell indicated on Wednesday.

Morning Rush

• The 10-year Treasury yield (TNX) rose to 3.61% after falling to 3.51% overnight, the lowest since late September.
• The U.S. Dollar Index ($DXY) is at 104.5.
• Cboe Volatility Index® (VIX) futures hover just above 20.
• WTI Crude Oil (/CL) is up 0.8% at $81.89 per barrel

For the VIX, yesterday’s venture below 20 was the first time it’s been in the teens since mid-August. It’s also significant because 20 is considered approximately “average” for the VIX historically. Although it’s still way above last January’s lows below 17, a falling VIX generally signals less uncertainty in the market and possibly better times for stocks.

However, keep in mind that a slide in the VIX is sometimes seen as a contrarian signal, meaning stocks might actually drop if investors 

Numbers to Know

Here are three numbers to keep in mind as we approach the weekend, courtesy of Charles Schwab’s Chief Market Strategist Liz Ann Sonders:

93%: The percentage of S&P 500 members trading above their 50-day moving average (MA). That’s the highest percentage since June 2020 and “just barely” above thresholds crossed in August 2022 and April 2021.

416%:  Challenger Gray & Christmas reports that job cut announcements were up 416% year over year in November, a significant increase from 48% in the previous month and the largest jump since July 2020. Of these, 24% were due to cost-cutting, and 16% were due to market conditions. Could this be a “canary” for the market?

2.8%. The Atlanta Fed’s GDPNow estimate for Q4 growth fell to that Thursday from the previous 4.3% based on recent data including a few of the numbers we saw yesterday. Quite the haircut.

One big data point that both GDPNow and stocks reacted to Thursday was a disappointing November ISM Manufacturing figure of 49%. The number was down from 50.2% in October and below the 50% level that indicates expansion for the first time since May 2020. That broke a 29-month expansion streak, according to Briefing.com.

Headline ISM wasn’t the only bearish part of the report. There were also interesting numbers lower down that raised worries about the economic picture. For instance, the prices component fell to its lowest level since May 2020; new orders also slipped.

Coming after a very soft Chicago PMI report Wednesday and slower manufacturing data from Asia recently—including China—Thursday’s ISM rained a bit on the market’s mid-week parade, though stocks entered Friday up sharply for the week.

Inflation appears to be easing a bit, and that’s certainly welcome on Wall Street, judging by November’s rally. Still, reports like these raise the question of what damage the Fed did trying to fix that problem. October Factory Orders next Monday is another report to watch for possible evidence of sliding manufactured goods demand.

Reviewing the Market Minutes

Though the SPX recovered most of its 1% early losses by the end of Thursday to finish with just a narrow decline, the ISM data was the key moment of the day and appeared to weigh on shares of industrial stocks like Honeywell (HON), Caterpillar (CAT), and Boeing (BA)—all members of the Dow Jones Industrial Average® ($DJI).

The $DJI was also held back by weakness in Salesforce (CRM). The company’s lower-than-expected revenue guidance was only one of the issues dogging CRM shares yesterday. Investors also reacted poorly to news of Co-CEO Bret Taylor announcing his departure. Sometimes, you’ll see a stock rally when a company leader leaves, but this wasn’t one of those cases: CRM dropped 8%.

Here’s how the major indexes performed Thursday:

• The $DJI fell 194,76 points, or 0.56%, to 34,395.
• The Nasdaq Composite® ($COMP) rose 0.13% to 11,482.
• The Russell 2000® (RUT) fell 0.26% to 1,881
• The S&P 500® index (SPX)  pulled back 0.09% to 4,076, still in range of Wednesday’s nearly three-month highs.

Talking Technicals: It may have been technically significant to see the SPX bounce off 4,050 yesterday, near its 200-day MA of 4,048. Buying interest appeared to come in quickly after the SPX dropped to that level in the first hour of Thursday’s session.

CHART OF THE DAY:  BEEN A WHILE. The U.S. Dollar Index ($DXY) dipped below its 200-day MA (red line) yesterday for the first time in more than a year. While this doesn’t necessarily ensure more weakness to come, it’s probably a welcome development for U.S. multinational companies whose earnings have been hurt for many months by the greenback’s strength. Data source: ICE. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Three Things to Watch

Plan Your Week: Today’s jobs data is No. 1 on the runway, but there are some key data points next week, with Friday’s November Producer Price Index (PPI) likely taking precedence. We won’t get a look at the November Consumer Price Index (CPI) until the following week, but keep in mind, PPI can often provide early insight into consumer prices because wholesale price increases often get passed along to consumers. Other important stuff to keep an eye on before PPI next week include November’s ISM Non-Manufacturing Index and October’s Factory Orders, both due just after the opening bell Monday. However, both are considered second-tier reports and probably won’t affect stocks much unless one or the other contains some sort of huge surprise.

Tighter Money Seen Ahead: Of course, the following week (the week of December 12), things get exciting again as focus turns to the Federal Open Market Committee (FOMC) meeting. Besides the rate decision, FOMC officials will release new economic projections and a dot-plot showing where they expect rates to head in coming years. Despite a lot of bullish enthusiasm after Fed Chairman Jerome Powell’s comments Wednesday on the size of future rate hikes, it’s still probably too early to get overly optimistic, according to a client note from research firm CFRA.

Citing Action Economics, CFRA said investors might want to get ready for 50-basis-point Fed hikes in both December and February, followed by a 25-basis-point hike in March. That means a terminal, or peak rate, of between 5% and 5.25% next year before a possible rate cut by the end of 2023. CFRA also said shorter-term momentum indicators provide continued support for the market’s advance, but there are signs of wavering.

Corporate Checkup: One way to monitor Wall Street’s vital signs is to watch the corporate bond market, which for now doesn’t seem to need a doctor. The New York Fed’s Corporate Bond Market Distress Index (CMDI), which updates near the end of each month, delivered a relatively clean diagnosis in November. “Corporate bond market functioning appears healthy, with the overall market-level CMDI below its historical 65th percentile,” the New York Fed reported. “Market functioning continues to be somewhat more strained in the investment-grade segment, but investment-grade market functioning improved over the course of the month.” One caveat: CMDI can lag in determining how fundamental factors might affect companies’ future creditworthiness. For instance, though oil prices began falling in late 2014, the CMDI didn’t begin to rise until the fall of 2015 when these price shocks led to credit losses in oil companies.

Notable Calendar Items

Dec. 5: November ISM Non-Manufacturing Index and October Factory Orders

Dec. 6: October Trade Balance and expected earnings from AutoZone (AZO) and Casey’s General Stores (CASY)

Dec. 7: October Consumer Credit and expected earnings from Campbell Soup (CPB)

Dec. 8: Expected earnings from Broadcom (AVGO) and Costco (COST)

Dec. 9: November PPI and Preliminary December University of Michigan Consumer Sentiment Index

Dec. 12: November Treasury budget

Dec. 13: November CPI, FOMC meeting begins, and expected earnings from ABM Industries (ABM)

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