The Market Today

Payrolls Beat Expectations, Earnings Remain Stubbornly Low

by Craig Dismuke, Dudley Carter

Today’s Calendar – Payrolls Beat Expectations, Earnings Remain Stubbornly Low:  Nonfarm payrolls grew 228k in November, surpassing expectations of 195k.  Private payroll growth added 221k new jobs while government jobs increased 7k. The previous two months’ payroll figures were revised up fractionally, with 20k payrolls added to September’s abysmal +18 report and 17k subtracted from October’s 261k report.  It appears that some of this is likely related to a delay in reporting from hurricane-affected areas.  Regardless of the hurricane-induced fluctuations, Novembers 228k tally meaningfully surpasses 2017’s month average of 174k payrolls.  Looking by sector, manufacturing, retail, and education & healthcare all outperformed their 12-month averages.  The manufacturing sector had a remarkably strong month adding 31k jobs, the second best month for the sector in four years.


In the household report, the unemployment rate rose 0.03% to 4.12% (the headline figure still rounds to 4.1%).  There were no wild swings in participation in November.  The number of people not in the labor force rose 35k while those in the labor force increased 148k.  The number of employed rose 57k and the ranks of the unemployed increased 90k.  There were 84k who were unable to work because of weather, a fairly average reading for a November.


The hours worked and earnings data were mixed.  Average weekly hours rose from 34.4 to 34.5.  However, average hourly earnings remained stubbornly sluggish.  Earnings rose just 0.2% MoM after being revised down from +0.0% to -0.1% in October.  As a result, year-over-year-over-year earnings growth did not accelerate to 2.7% as economists expected, but rose to just 2.5%.  Ironically, while the retail and manufacturing sectors were positives for job growth, earnings were not so strong.  Manufacturing earnings dropped 0.15% MoM and retail earnings rose a paltry 0.11%.  additionally, after earnings in the utilities sector jumped during the eye of the hurricane effects, they have since reversed, down 0.33% in November, helping dampen overall wage growth.


Bottom Line: Nonfarm payroll growth was stronger-than-expected and remains above-trend for 2017.  The unemployment rate held at its lowest level in 17 years.  But, weak earnings growth continues to confound the models.  Increasingly, Fed officials are likely to begin studying why this historical relationship is ineffectual in this cycle.  This morning’s report will very likely keep the Fed on track to hike next Wednesday, but will have longer-term effects on policy.


At 9:00 a.m. CT, the October Wholesale Inventories report is expected to show a 0.4% MoM pullback and the December University of Michigan Consumer Confidence report is expected to show another uptick.


Overnight Activity – Solid Data and Positive Brexit Development Strengthen Market Sentiment to End the Week: Friday’s trading patterns look distinctly different than this week’s average trends. Global equities are having one of their firmest sessions of the week as a positive start in Asia rolled over into European markets. Solid economic data is at least partly responsible for the stronger start after a couple of stronger-than-expected key economic data points in Asia. Japan’s Nikkei rose 1.4% after 3Q GDP growth was revised up to 2.5%, greater than the 1.5% median economist estimate. China’s CSI 300 added 0.8% following trade data for November that easily surpassed estimates; exports rose 12.3% (+5.3% expected) and imports improved 17.7% (+13.0% expected). The Stoxx Europe 600 added 0.8% as its financials sector led with a 1.8% rally. The sector benefited from news speculating that changes to capital rules being agreed to as part of finalizing Basel III would be beneficial to European banks. Also helping sentiment was a breakthrough on the Brexit front. The U.K. and EU agreed to an amount to settle the U.K.’s divorce payment and found some common ground on the treatment of EU expats living in the U.K. and the Irish border issue. This should allow the parties to push forward into talks about a trade agreement. Before this morning’s jobs report, U.S. futures were following the daily trend with all three major indices higher and tech outperforming. U.S Treasury yields also moved up in lockstep with other developed nations with the 2-year yield up 1.0 bp and the 10-year yield 1.4 bps higher. After this morning’s jobs report showed another month of solid hiring spurring only tepid wage growth, markets responded dovishly. The 2-year yield fell to down 0.8 bps while the increase in the 10-year yield eased to 0.9 bps.


Yesterday’s Trading Activity – S&P Breaks its Losing Streak, 2s10s Steepens for the First Time in Five Days: U.S. stocks recovered from a mid-morning slip and the S&P managed to end its four-day losing streak. The Nasdaq led gains as tech companies improved for a second day. The index’s 0.54% rise marked its best day in the last five sessions. The Dow and S&P both moved up 0.29% and were led by the industrials and materials sector. Those sectors were up strongly from the start but were also likely supported by a report that refocused the market’s attention on a seemingly forgotten component of President Trump’s campaign platform. A news report cited a White House official as saying that the President hopes to announce details of his infrastructure plan ahead of his January 30 State of the Union address. That report also closely coincided with a move up in longer yields that helped unwind the early morning curve flattening. All told, the 10-year yield closed off its high, up 2.5 bps at 2.36%. The 2-year yield fell 0.4 bps to 1.80%. Just as Treasurys stopped trading for the day, the House and Senate both passed a stopgap spending bill to keep the government open through December 22. The Dollar continued to quietly strengthen to a more than two-week high against the Euro and a three-week high against the Yen. However, the British Pound was the best performing currency on reports that a possible deal on the Irish border may be in reach which would help push Brexit negotiations forward. The Pound hit an almost six-month high against the Euro.


Net Worth Rises to New High in 3Q: Household net worth climbed $1.7T in the third quarter to reach a new record high of almost $97T. Total assets grew by just over $1.9T while liabilities rose by $0.2T. On the asset side of the balance sheet, financial assets accounted for 75% of the total quarterly Dollar value change as compared to 61% in 2Q. Equities accounted for nearly half of the $1.4T increase in financial assets. Stocks have had an impressive record run this year and continue to be one of the often-cited reasons by consumers as to why they are becoming increasingly confident. As to nonfinancial assets, a smaller gain in the value of real estate assets was responsible for the category’s smaller share of the total change. Consumer debt was up $178B with mortgages making up around half of the change.


Consumer Credit Expands by the Most This Year: Consumer credit grew by $20.5B in October, the most since November 2016, as consumers ramped up their usage of revolving credit. The revolving credit category, which consists primarily of credit card debt, rose at an annualized 9.9% pace in October to mark the strongest month since November of last year. The three months ended October saw the third strongest growth rate for revolving credit of this cycle. Considered alongside the record-high consumer confidence, the expansion of credit could be a positive for future economic activity. The non-revolving category, made up mostly of auto and student loan debts, expanded at a 5.3Z% annualized rate, slightly slower than September’s pace.

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