More Jobs, Slower Wages Growth: December Employment Data Keeps Focus on Fed Toolbox

The U.S. economy added 223,000 jobs last month, well above the expected 200,000 target, but the unemployment rate fell slightly to 3.5%. November’s job growth was a revised 256,000. Notably, the lower unemployment rate accompanied news that the labor force participation rate rose to 62.3%, which is still a percentage point below pre-pandemic levels.

But wage growth could be the main point of discussion today as it came in below expectations. That’s a potential sign that inflation could be weakening. Average hourly earnings gained 0.3% for the month and increased 4.6% from a year ago. Consensus was for respective growth of 0.4% and 5% on those numbers. 

Treasury yields fell slightly this morning, while major stock index futures gained close to a percent just after the Department of Labor released its figures. Before the open, the Cboe Volatility Index® (VIX) stood at 22 even, more than 2% down from yesterday.

There also seems to be a bit of new optimism for a 25-basis-point cut at the next at the next Federal Open Market Committee (FOMC) rate announcement February 1. Just after the employment announcement, the CME FedWatch Tool showed a 69.1% probability of a 25-basis-point hike. That’s up from a little over 62% a day ago, but it had been as high as 72.8% the week before. 

Available jobs with good wages are great for households and usually for the economy too. But blend high wages and plenty of openings with historic disruptions in supply chains and worker behavior, and that spells a historic challenge for the Fed.  

Perhaps the Fed can switch from its first-responder approach in 2022 to a more surgical one in 2023.

Morning Rush

• The 10-year Treasury yield (TNX) moved down slightly to 3.72%

• The U.S. Dollar Index ($DXY) gained 0.15% to 105.19

• WTI Crude Oil (/CL) moved up 1.68% to $74.91 per barrel.

Yesterday’s strong hiring data put stocks on a steep downward swing, but an unlikely rescuer helped buoy shares somewhat before the close. St. Louis Federal Reserve Bank’s James Bullard, known as one of the central bank’s most consistently hawkish members, said in a presentation to St. Louis business leaders that rates haven’t been “sufficiently restrictive” yet in slowing the economy—but they’re “getting closer.”

According to Bloomberg, a chart in Bullard’s presentation showing Fed officials’ median projection for where rates will land in 2023—5.1%—may be close enough.

In December, the Fed stepped down to a 50-basis-point rate increase from a record four 75-basis-point hikes in the previous months. That brought the central bank’s target to a range of 4.25% to 4.5%. 

Bullard’s comments proved to be the sunniest of the day. Retiring Kansas City Fed President Esther George told CNBC earlier today that she expects the federal funds rate to stay above 5% into 2024 if the Fed is to beat U.S. inflation, which is still at 40-year highs.  

And Atlanta Fed President Raphael Bostic added Thursday that the central bank still has “much work to do” to bring inflation under control.

Stocks on the Move

Southwest Airlines (LUV) was down 2.18% in premarket trading today after announcing it plans to report a fourth quarter loss because of December’s flight cancelation crisis. Southwest’s problems were front-and-center during the chaotic holiday travel season and LUV said its own disruptions cost it between $400 million and $425 million in lost revenue.

Bed Bath & Beyond (BBBY) plummeted nearly 30% by Thursday’s close and was down another 12.43% overnight after the struggling home goods retailer warned that it’s running out of cash and considering a bankruptcy filing. The one-time meme stock said Thursday it expects a net loss of $385.8 million for the third quarter when it reports results scheduled for January 10. 

Walgreens Boots Alliance (WBA) gained 0.45% in Friday’s premarket after losing 6.1% after announcing earnings yesterday. The pharmacy giant reported better-than-expected earnings but didn’t change its profit forecasts.

Tesla (TSLA) got even closer to $100 a share in today’s premarket trading—down another 6.32% to $103.36. On Thursday, the electric vehicle maker lost another 2.90% to close at $110.34.

Reviewing the Market Minutes

This week, some investors managed to think of little else besides three things—jobs, jobs, and jobs. More to the point, the stubborn strength of U.S. hiring remains great for workers but not so great for a Federal Reserve trying to vanquish the highest inflation levels since the 1980s.

On Thursday, reports ahead of today’s Nonfarm Payrolls data managed to significantly vanquish Wednesday’s rally, sending major markets down more than 1% to finish the session. At its worst point, the Dow Jones Industrial Average® ($DJI) was down nearly 400 points before closing with a nearly 340-point deficit.

Here’s how the major indexes performed Thursday:

• The $DJI lost 339.69 points, or 1.02%, to finish at 32,930.08.

• The Nasdaq Composite®($COMP) fell 153.52 points, or 1.47%, to 10,305.24.  

• The Russell 2000® (RUT) retreated 19.35, or 1.09%, to 1,753.19.

• The S&P 500® index (SPX) slid 44.87 points, or 1.16%, to close at 3,808.10.

As mentioned, 3,800 looked like a support level for the SPX on Thursday.

Among all market sectors, energy (+1.99%) was the only gainer for the session with real estate (–2.89%) losing the most ground. WTI Crude Oil closed at $73.93 Thursday, up 1.5%. Mild global temperature forecasts pushed Natural Gas down 9.49% in yesterday’s trading.

After a strong Job Openings and Labor Turnover Survey (JOLTS) on Wednesday, came data that triggered Thursday’s retreat in equities and early morning gains in bond yields and the U.S. dollar (see below):

The ADP Employment Change Report for December showed private-sector employment rose by 235,000 jobs during the month. The consensus was around 150,000. The biggest employment growth was in leisure and hospitality, adding 123,000 positions, while professional and business services grew 52,000. Education and health services came in third at 42,000.

Weekly Initial Jobless claims tallied on December 31, admittedly the end of a holiday week, were at their lowest levels since September. Initial claims came in below the 225,000 consensus at 204,000 for the week, while continuing jobless claims for the week ending December 24 decreased 24,000 to 1.694 million. 

CHART OF THE DAY: DOLLAR BOUNCE. Moments after the release of Thursday’s hotter-than-expected Weekly Initial Jobless Claims data, the U.S. Dollar Index ($DXY) bounced off support going back to 2002. Both bond yields and the greenback moved higher early in the session amid continuing evidence of a U.S. job market that’s showing little signs of cooling—or resetting the Federal Reserve’s direction on interest rates. A stronger dollar could mean fresh headwinds for multinational companies in the coming year. Data sources: Cboe, S&P Dow Jones Indexes. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Three Things to Watch

Turning to the Consumer: On Monday, the data focus goes from jobs to wallets as the Federal Reserve releases November Consumer Credit report. It measures some of the most common debt Americans have—credit card, student loan, and auto loan balances. In October, the numbers were somewhat eye-popping as borrowing increased by $27 billion during that month, up 6.9%. In November, a separate report from the New York Fed noted that third quarter 2022 credit card balances were up 15%, the quickest growth in 20 years.

About Those Credit Cards: Bankrate reported yesterday that by the end of 2023, the average credit card interest rate is expected to hit the highest level in 40 years: 20.5%, compared to 19.6% at the close of 2022. Greg McBride, Bankrate’s chief financial analyst, indicated it could mean trouble for the average credit card customer if the economy—and the job market—begins to falter. “In a weaker economic environment, credit quality tends to suffer as people fall behind or default,” McBride told Bloomberg.

Be It Ever So Humble: Not many people buy homes around the holidays, but the mortgage market still made news. The Mortgage Bankers Association reported Wednesday that demand for mortgages has fallen to the lowest level since 1996. The average 30-year fixed-rate loan rate stood at 6.48%, Freddie Mac reported yesterday, up slightly from the previous week but down from late 2022 highs above 7%. As homebuyers, home sellers, and sales agents anticipate the traditionally busy spring and summer selling month, it might be worth remembering where the 30-year rate was a year ago this week: 3.22%.

Notable Calendar Items

Jan. 6: December Nonfarm Payrolls, November Factory Orders, and December ISM Non-Manufacturing Index

Jan. 9: November Consumer Credit

Jan. 10: November Wholesale Inventories and expected earnings from Albertsons (ACI)

Jan. 11: Expected earnings from KB Home (KBH)

Jan. 12: December Consumer Price Index (CPI) and expected earnings from Delta (DAL) and Taiwan Semiconductor (TSM)

Jan. 13: January University of Michigan Consumer Sentiment and expected earnings from JP Morgan (JPM), Bank of America (BAC), Citigroup (C), and Wells Fargo (WFC)

Jan: 16: Dr. Martin Luther King, Jr.’s birthday observance. Markets closed.

Jan. 17: January Empire State Manufacturing and expected earnings from Goldman Sachs (GS) and Morgan Stanley (MS)

Jan. 18: December Retail Sales and Producer Price Index (PPI)

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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