The Market Today

Disappointing 148k Jobs Added in December, Unemployment Rate Held at 4.1%, Earnings Growth Firmed Slightly

by Craig Dismuke, Dudley Carter

Today’s Calendar – Busiest Day of the Week Holds December Nonfarm Payrolls, November Trade Balance, December ISM Non-manufacturing PMI, November Factory Orders, Two Fedspeakers: The December headline hiring figure was a disappointment. According to the BLS’s latest release, the economy added 148k jobs in the final month of 2017. That was 42k jobs short of the median estimate and 102k below what ADP predicted. Adding to the disappointment was a net negative 9k downward adjustment to the prior two months’ tallies. Within the details, the services sector was the main driver of the headline weakness. After adding an average of 180k jobs in the last two months, services-providing industries increased payrolls by just 91k. The biggest downshift in the pace was concentrated in a handful of sectors that had been strong in November. Trade and transport companies shed 10k jobs in December compared with a 43k increase in November; retail jobs were a big reason comparing December’s -20k to November’s +26k. Business services, which averaged 43k over the prior 12 months, added just 19k in its weakest month since January 2016. Hiring in education and health slowed by 22k compared with November. The lone bright spot for hiring was the continued strength in goods-producing industries. Goods producers added 55k jobs in December; 30k construction jobs and 25k manufacturing jobs.


In the household report, the unemployment rate ticked down to 4.095% but still rounded to a 17-year low of 4.1%. The details were unexciting but the slightly lower rate was driven by 40k fewer people reporting as unemployed. The labor force grew by 64k which kept the participation rate unchanged at 62.7%. The U-6 unemployment rate, the broadest official rate, ticked up from 8.0% to 8.1%.


The earnings data was slightly more encouraging as average hourly earnings grew by 0.34% MoM, the best result in three months, which lifted the YoY growth rate from a revised-lower 2.4% to 2.5%. November’s YoY rate was weaker because the November MoM change was lowered from 0.2% to 0.1%. The length of the workweek was unchanged at 34.5 hours.


Bottom Line: Hiring in December was a disappointment compared to the ADP report, most economists’ estimates, and what markets were expecting. However, it’s important to remember that the Fed expects a much lower rate of hiring over the long run, somewhere around 100k depending on which official you ask. In fact, the December Minutes released on Wednesday noted hiring had been running “well above a pace consistent with maintaining a stable unemployment rate over time.” As a result, the Fed is likely less disappointed than others. In fact, they were probably more interested in the unemployment rate, which was unchanged, and earnings growth, which was firmer MoM. As a result, the December jobs report should be a push for the Fed and cause them little concern in either direction (i.e. upside or downside risks to their three-rate-hike projection for 2018).


The daily economic data flow doesn’t stop with the payroll report. November’s trade balance was released simultaneously and showed a slightly wider-than-expected deficit for the month of November. At 9 a.m. CT, there are two key reports set to be released, December’s ISM Non-manufacturing PMI and November’s Factory Orders Report. The Non-manufacturing PMI is expected to show a slight improvement to close out 2017 and the Factory Orders Report is expected to show a transportation-driven rebound at the headline level. It will also include revisions to preliminary estimates for the important business spending categories. Two Fedspeakers will wrap up Friday’s schedule, Philadelphia’s Harker (non-voter) at 9:15 a.m. CT and Cleveland’s Mester (voter) at 11:30 a.m. CT. Mester’s comments, which have slanted hawkishly in recent months, will be the first since she rotated onto the voting committee in 2018.


Overnight Activity – Another Strong Day for Stocks Around the World: Positive momentum continued to push global equities higher overnight as investors showed little concern about this morning’s packed U.S. economic calendar, led by the December payroll report. In Asia, South Korean stocks outperformed after South Korea announced North Korea had agreed to meet next week for talks. But almost every other regional index moved higher as well. Most notably Japan’s Nikkei rose 0.9% to add to its 26-year high and shares in Hong Kong were up 0.3% to mark a new 10-year high. Similar strength has played out so far in Europe where Germany’s DAX was up 1.0% and leading after a surprisingly strong retail sales report. But the U.K.’s FTSE 100 stole the headlines by making a new all-time record high. European yields, however, haven’t moved higher with stocks. In fact, most sovereign curves there have flattened on lower yields, potentially in response to a softer-than-expected CPI report for December. Year-over-year Core CPI inflation for the Eurozone as a whole registered an unchanged 0.9% compared with estimates for a slight increase to 1.0%. Ahead of this morning’s busy U.S. calendar, the Dollar had firmed slightly, U.S. equity futures were up more than 0.3%, and Treasury yields had inched higher by less than 1 bp across the curve.


Yesterday’s Trading Activity – Dow Climbed to 25,000 as Curve Flattened to New Cycle Low: Thursday marked another milestone for U.S. equities as the Dow closed above 25,000 for the first time in history. The blue-chip index was Thursday’s top performer with its 0.61% move higher outpacing smaller gains of 0.40% and 0.18% for the S&P and Nasdaq. As the index crossed its latest milestone, the push higher accelerated and sent the Dow to an intraday high of 25,105 (closed at 25,075). Materials and financials led the Dow’s gains and were also the top two performers (in reverse order) within the S&P. Only two of the 11 S&P sectors, utilities and real estate, lost value. Despite the exuberance for equity investors, an early morning sell-off in Treasurys moderated somewhat, more so in longer maturities. After rising as much as 4 bps just after U.S. trading opened, the 2-year yield settled up 2.0 bps at 1.95%, a new high for the cycle. Other maturities seven years and in made similar shifts while changes in longer maturity were more muted. The 10-year yield added just a 0.5 bps to 2.45%, taking the spread between 2s and 10s below 50 bps (49.7 bps) for the first time since October 15, 2007. As the curve flattened, the Dollar dropped to match its weakest level since mid-September.

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