This morning is light on both economic and earnings news, but that will change tomorrow with the release of the much-anticipated report on November employment and unemployment. The data in that release has the potential to be a market-moving event. We did receive some labor market data ahead of those reports this week. At 8:30 A.M. (EDT), the Labor Department reported that jobless claims for the week ending December 2nd came in at 220,000, up slightly from the prior week’s figure. Continuing jobless claims, which topped 1.9 million last week and was at a two-year high, fell back below that mark in the latest week. Today’s labor market data was better than expected and in contrast to yesterday’s report from Automatic Data Processing (ADP) showing a slowdown in private sector payroll growth. These contrasting reports create some unknowns ahead of the November government jobs report.
Barring some unforeseen breaking news later today, our expectation is that we will probably not see a major move for equities ahead of tomorrow’s November jobs report. The futures, which were mixed heading into the claims data, are now indicating a modestly higher opening when trading kicks off stateside today. Yesterday, stocks never strayed too far away from the neutral line and a similar performance during today’s session is quite plausible.
We think the attention will be on the average hourly wage figure, which will provide some more insight about inflation in the labor market. The consensus is that hourly wages increased 4.0% (annualized) last month, which would be down nominally from the October rise of 4.1%. If it comes in lower than the consensus it may put some more downward pressure on Treasury market yields and give a further boost to equities. Stocks powered higher over the last month of trading on the sharp move lower in Treasury yields. Our sense is that the market would be okay with weaker-than-expected job creation, but most investors don’t want to see a big drop in job gains. The latter may raise concerns about the health of the labor market and bring sentiment about a hard landing for the U.S. economy in the first half of 2024 back into the conversation.
It is worth noting that over the last bullish month of trading, we are seeing some notable sector rotation in the equity market as investors favor different types of companies. The most recent movement has been to buy into more “defensive” groups – those that would be expected to hold up well even if an economic slowdown is sharper than most have predicted. This is not overly surprising, as investors want to be in equities during a period when Treasury market yields are falling, but saw the market rally sharply in November and it is now looking a bit overbought.
The “flight-to-safety” movement, which has increased demand for gold holdings and pushed the price of the yellow metal to an all-time price north of $2,100 an ounce recently, also is being driven by some increasing worries about the health of the U.S. economy next year when the full effects of the Federal Reserve’s most restrictive monetary policy course in 40 years are seen. Concerns about decreasing global demand for oil, and the subsequent drop in crude prices, may also be a sign that global growth is slowing. Oil and gas stocks have been under some pressure recently on these worries.
The stocks of the financial services companies and banks, which have struggled for much of this year, have rallied over the last month, as Treasury market yields have pulled back. This has reduced concerns that there will be a large drop in deposits, as investors are less likely to take funds out of interest bearing savings and checking accounts and move them into higher-yielding money market and related shorter-duration cash equivalent accounts. This money drain led to the collapse of a few of the larger regional lenders and specialty banks this past spring. Investors now appear to be looking at an opportunity to produce some gains in one of the few sectors that did not get bid up sharply this year. – William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
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