You’re hired! Stocks leapt higher on Friday in response to a surprisingly good jobs number. Bulls settled in for the ride piecing together all of the positive news, pushing trade to the back burner.
N O T E W O R T H Y
- Get to work! On Friday the Bureau of Labor statistics released its monthly employment situation beating Wall Street estimates on the upside. Non-Farm Payrolls showed an increase of +266k jobs compared to last month’s revised increase of 156k jobs. The Unemployment Rate ticked down to 3.5% from 3.6%, the lowest level since 1969. The continued strong performance has left many economists puzzled. There is a concept in economics known as full employment. If you listen carefully to Fed speakers you would have heard it coming up quite often over the past few years. The concept states that there is some level of unemployment at which all people who are employable are employed. In that scenario, qualified workers become scarce causing employers to have to raise wages, ultimately causing inflation and an overheating of the economy. Well, needless to say, that has not happened yet; the economy continues to grow at a respectable but tame pace and inflation remains below the Fed’s target. How can this be? One plausible reason is that wages, while growing, have not advanced at the same pace as in past economic expansions. After declining in the wake of the last recession, average yearly hourly wage growth did not pick up until 2015 when it ticked up from roughly +2% on average to +2.5%. The growth rate remained around that level until 2018 at which the rate began increasing, hitting a high of 3.4% in February 2019. Of course, it was during this period that the Fed was raising interest rates, tapping on the brakes. The Fed has since shifted to an easing stance, but despite the policy shift, wage growth has slowed to +3.1%, as of last Friday’s report. Interestingly, the Tax Cuts and Jobs Act of 2017 was supposed to really drive home economic growth which it has to some extent, but not in the way many expected. The act, which is considered fiscal stimulus, put a large amount of capital in the hands of corporations with the hopes that it would spur capital investment and wage growth. When the Act was passed, the unemployment rate was already considered low, having fallen to 4.2% from its recession high of 10.2%. Corporations, rather than spending the newfound cash aggressively on employment and investment, spent a great deal on stock buybacks and dividend increases. Great for stocks, maybe not so good for workers who would surely appreciate growth in wages. That said, corporations reluctance to spend it on labor has kept the economy in check. In this case corporate greed may actually be good, having helped extend the economic expansion, now in its eleventh year.
- Goldilocks. As if Friday’s blowout jobs numbers was not enough to grease the skids for the bulls, the University of Michigan Sentiment index showed a greater than expected increase in consumer confidence. The number beat expectations coming in at 99.2 compared to last month’s 96.8. The number represents the fourth monthly increase since hitting a three-year low this summer. This can be contrasted to the manufacturing PMI falling for four consecutive months, as reported earlier in the week. The consumer, employed and confident continues to drive the US economy into record territory. This Goldilocks scenario remains supportive for stocks at the moment but one can assume that any more moves from the Fed would not be likely in the near future… unless something changes. The likelihood of a Fed rate cut at this week’s meeting is now less than 1% according to Fed Funds futures.
- Ticking away. Lot’s of noise… still no deal. Larry Kudlow, usually the Administration’s guy who comes out with exuberant soundbites about the economy and the progress of trade talks, struck a different tone on Friday. In his statements, Kudlow said that the Trump administration is prepared to walk away from a trade deal if the terms were not right. Either the markets have become tone deaf to these statements or the jobs data from earlier in the day was too good to pass up. Probably more the latter than former. Still China made a concession earlier in the day announcing that it would remove tariffs on US farm imports, which was positive. WHILE YOU SLEPT, China announced plans to phase out foreign technology, similar to the Administration’s policies on Chinese networking technology. The move could put pressure on exposed tech shares today. Also, WHILE YOU SLEPT, China released economic figures which showed that exports to the US unexpectedly dropped by -23% year over year. The figure underscores the importance to get a deal done. A deal which will be in peril if agreement is not reached in the coming days, as a new load of tariffs is scheduled to take effect on December 15th.
Markets popped on Friday on good jobs data and strong consumer confidence readings. The S&P500 rose by +0.91%, the Dow Jones Industrial Average climbed by +1.22%, the Russell 2000 advanced by +1.18%, and the NASDAQ Composite Index traded up by +1.00%. Bonds slipped and 10-year treasury yields climbed by +2 basis points to 1.83%. Crude oil rose another +1.83% making up some more ground in response to the supply cuts announced by OPEC.
– This week’s economic numbers include reads on inflation with CPI and PPI as well as Retail Sales figures for November. The Federal Reserve will hold its FOMC meeting and announce policy on Wednesday. The press conference that follows will be highly watched for clues.
– This morning Thor Industries missed expectations and we will hear from Toll Brothers, Vail Resorts, Chewy, and Stitch Fix after the bell.
– Please refer to the attached weekly economic and earnings release calendars for details.