The Market Today
Not-Great Jobs Data, but Likely Good Enough
by Craig Dismuke, Dudley Carter
Weakest Job Report of 2018 (in Total), but Good Enough to Keep a December Hike on the Table: The November jobs data showed a mixed bag. Payroll growth remained healthy, the unemployment rate held at its lowest level since 1969, and average hourly earnings growth held at its highest pace of this cycle. On the flip side, payroll growth slowed, the number of people employed part-time for economic reasons rose, and some of the shine of 3.1% earnings growth was tempered by a drop in average weekly hours worked. The November jobs data provides an ideal backdrop for the Fed to transition from auto-pilot to more data-dependent (i.e. potentially pausing) monetary policy.
Total nonfarm payrolls grew 155k in November, below the projected 198k and the second weakest report of 2018. Additionally, October’s job gains were revised down from 250k to 237k. Total payroll growth for 2018 now averages 206k per month and the 3-month average is down to its weakest rate, 170k, of the year. Nonetheless, payroll growth remained well above the 100k-125k that Fed officials believe is sustainable given today’s slower growing, labor-force-aged population. Most sectors were slightly weaker than their 12-month run rates with the exceptions of stronger manufacturing, retail, and transportation sectors; and a much weaker growth in construction jobs (likely the result of an early season snow storm).
In the household report, the unemployment rate fell from 3.74% to 3.67%, still rounding to 3.7%. On a positive note, 133k more people reported as in the labor force, 233k more people reported as employed, there was some month-over-month migration from part-time workers to full-time, and 120k fewer people reported as long-term unemployed. Conversely, 181k additional people reported as employed part-time for economic reasons which pushed the underemployment rate up from 7.4% to 7.6%.
As for the ever-important earnings figures, average hourly earnings rose 0.2% in November but October’s figures were revised down enough to take the MoM growth from +0.2% to +0.1%. As such, rather than rising to 3.2% YoY, earnings growth held at 3.1%. As for the momentum indicator, the 3M/3M annualized rate of earnings growth fell from a worrisome 3.6% to 3.3%. Discouragingly, the decent November earnings came as weekly hours worked fell from 34.5 to 34.4.
Taking into account the moderate job growth, decent hourly earnings, and weaker hours worked; the November jobs report shows the weakest results of 2018 (see Chart of the Day). However, the figures remain solid enough to keep the outlook positive. Moreover, they should be sufficient to keep a December rate hike on the table.
Yesterday – Yields Ended Lower But More Than Halved Sharp Early Decline as Stocks Staged Impressive Intraday Recovery: Thursday was another whippy day on Wall Street as stocks sank in the morning as uncertainty intensified and global equities sold off. A Wednesday evening report that the CFO of a major Chinese tech company was had been arrested by Canadian officials on behalf of the U.S. stoked fears that reaching a trade deal within the 90-day tariff hiatus might be even more difficult than previously thought. U.S. futures sank overnight as Chinese stocks sold off more than 2%. The results were even worse in Europe, where the Stoxx 600 tumbled over 3%, its worst day since Brexit, and deeper into a correction (-14.8% from most recent peak). The index closed at its lowest level in more than two years. U.S. stocks followed, with the S&P 500 sinking as much as 2.9% by mid-morning. However, a sharp recovery in tech and a late-afternoon WSJ report (more below) that the Fed was considering signaling a “wait-and-see mentality” for any 2019 hikes helped nearly erase the drop. The index fell just 0.15% and closed on its highest tick of the day. Still, there were some losers. Energy underperformed as oil prices pulled back after OPEC failed to get Russia on board with production cuts. Financials fell as yields continued their margin-compressing trend lower extending S&P 500 banks’ weekly loss to 6.2%. Trade sensitive materials and industrial companies also suffered on renewed concerns about trade. The broader index remained below its 200-day average for a second day in a row and the 29th time in the last 33 sessions. The Treasury curve fell in the flight to quality, though yields more than halved their biggest decline as stocks recovered. The 2-year yield slid 3.5 bps to 2.76% after earlier falling more than 10 bps. Shorter maturities have been pulled lower as investors have trimmed their expectations for Fed hikes starting in 2019. The year-end 2019 Fed Funds rate implied in futures contracts has fallen to around 2.62%, the lowest since early July. The 10-year yield fell 1.8 bps but had dropped as many 9 bps. The spread between the two steepened for the first time in five days. The overall curve finished near its lowest level since early September.
Overnight – Equity Markets Recover As Investors Wait to See if Jobs Data Gives the Fed a Green Light on Patient Policy in 2019: U.S. futures had weakened in front of Friday’s U.S. payroll report for November despite Asian markets firming up and European indices, which closed down sharply Thursday just as U.S. markets staged their impressive intraday recovery, recovered a portion of their prior day’s slump. The U.S. Treasury curve flattened out some of yesterday’s steepening as shorter yields ticked up while longer yields moved modestly lower. The overnight news cycle was relatively slow and multiple global market analyses pointed to a lack of negative news on trade and the Thursday WSJ report on the Fed (more below) as the pre-payroll focus. China’s CSI 300 edged out a 0.3% weekly gain as the arrest of the CFO of a major Chinese tech company curtailed the optimism created by a temporary trade truce with the U.S. Friday’s gain for the Stoxx Europe 600 was built on strength in every sector but wasn’t enough to fully heal the wounds of its midweek meltdown. The index closed at a more-than-two-year low Thursday and finished down 2.9% for the week. The previous estimate of 1.7% YoY growth for the Eurozone in 3Q was shaved to 1.6% and still registered as the slowest since 2014. After swinging about immediately following the release of the jobs data, stock futures are higher, the Dollar is weaker, but interest rates have recovered from their initial drop and are roughly 1 bp higher across the curve.
ISM Services Survey Combines with Earlier Manufacturing PMI to Point to Domestic Economic Stability in November: The ISM’s non-manufacturing index rose unexpectedly in November, providing a silver lining for an otherwise disappointing day of U.S. economic data. Economists expected the index would pull back for a second month, but the 0.4-point monthly gain pushed the index up to its second best level since 2005 (behind September 2018.) A positive month for business activity (matched best market since 2004) and new orders (best since June) was enough to offset lower readings for employment (three-month low, but solid for the year) and delivery times (in line with 2018 average.) Comments provided more anecdotal evidence that the labor market is becoming increasingly tight and tariffs remain an area of concern. Combined with the unexpected increase in the manufacturing PMI earlier this week, the ISM surveys signaled activity was stable in November amid questions about sustained growth.
Thursday’s Fedspeak: As the markets have begun questioning the Fed’s rate plans for 2019, investors are keen for any signs from Fed officials that they too may become more patient than the median estimate from September’s projection. While the Fed’s last set of projections signaled a hike in December with three more to follow in 2019, recent market turmoil and questions about global growth have notably cut into what the market expects; the probability of a December hike dropped below 70% and the implied rate for the end of 2019 fell to 2.62%, the lowest since early July. On Thursday, Dallas Fed President Kaplan told CNBC, “I’ve had a lot of confidence that we should be moving along” but “at this stage, you’re going to hear me be a lot more cautious and counsel patience, …inflation – in my judgment – isn’t running away from us, …Normalizing monetary policy was always going to be challenging, and I think we’re in the stage of this process where you’re going to hear me shorten up on prognostications.” Speaking later, Atlanta’s Bostic said, “I see both upside and downside risks” to economic growth and acknowledged slower global growth, trade tensions, and financial volatility as “increasing uncertainties.” On the rate path, he said “we’re within shouting distance of neutral, and I do think neutral is where we want to be.” Fed Chair Powell praised a “very strong” labor market and an economy that is “currently performing very well overall,” at a conference on housing.
WSJ Reports the Fed Considering Signal for “Wait-And-See” Policy in 2019: A Thursday report from the WSJ, released with about thirty minutes to go in the U.S. equity trading session, was credited for the last kick higher for the major indices. The report noted, “Officials still think the broad direction of short-term interest rates will be higher in 2019,” but “are considering whether to signal a new wait-and-see mentality after a likely interest-rate increase at their meeting in December.” It went on to say, “How they manage this new, less-predictable approach will depend in large part on the performance of the economy and markets in the weeks ahead. Under the evolving ‘data dependent’ strategy, the Fed could step back from the predictable path of quarterly hikes it’s been on for most of the past two years, raising the possibility it might delay rate increases at some upcoming meetings.” This report aligns with language from several Fed officials recently, including Chair Powell, and the Minutes from the November meeting that have stressed data dependent decisions as policy gets back to the range of neutral estimates.