Tough jobs!

Stocks fell yesterday in the wake of a larger than expected ADP Employment Change number. Hiring in the private sector remains strong, indicating the labor market, is indeed, still tight.

Dueling dual mandate. Employment figures are always important numbers in all economic scenarios. Even market movers like inflation numbers, which have gotten much airplay in the past, rise and fall with importance. But job numbers, especially the monthly releases, are always of interest to traders, and can be market movers. Why? You probably know the answer to this one. Most of us rely on our salaries to… you know, pay the bills. After the bills comes food, and beyond that comes the fun stuff like vacations, shiny toys, etc. What’s left after those niceties comes savings for the future. Side note: my wife, who proofreads all my work, will surely send me a little note reminding me that savings should precede shiny toys. So, without pay, none of those things are possible, no matter how you prioritize them. On the other side of that spending are companies, who without revenues struggle as well. Got the picture?

Recession is just a word. A label given to an obscure thing called the economy, by a group of obscure economists. If nobody told you, you may not even realize if the economy was in a recession or not. However, if you lose your job, you would certainly know that things are tough. A healthy labor market is important for all those tangible reasons. It is so important that ½ of the Fed’s dual mandate is dedicated to keeping it healthy… until it intentionally wants to squelch it. Wait, what? Why would the Fed do that? Because it believes that the tight labor market being experienced in the US currently, is a key cause of inflation, which it is trying to fight as part of the other ½ of its dual mandate. You see, each half of that dual mandate is in conflict with the other. A tight labor market means that companies must pay higher wages to fill vacancies and those higher wages are ultimately borne by us, the consumers, as companies raise prices to maintain margins. That Fed has, in fact, made it clear that it would like to see the labor market soften up a bit before it could soften its hawkish behavior.

A good way to track the strength of the labor market is through monthly employment figures from the Bureau of Labor Statistics, which will be released this morning. Sure, there is the Unemployment Rate, standing at 3.7%, right above a 54-year low, but the real action is in the Nonfarm Payrolls number. That figure tallies up new hires from the prior month. In November 263,000 new hires occurred, and economists are expecting that another 202,000 were added in December. I know what you are thinking. You are probably thinking something like “what does a mere 200k new hires mean in the largest economy in the world where the population is 300+ million?” Well, it is not the actual number that is important, but the trend. In the recovery period after The Great Recession, monthly new hires bounced religiously around the 200k mark from 2011 through 2017 at which time the 12-month moving average began to slow, hitting a low of 150k in 2019. You may recall that the Fed was actually cutting interest rates in 2019. Then came the pandemic with massive layoffs and a recovery all in one year. By 2021 the monthly adds were in the 500k range, and the 12-month moving average was around 670k. In January 2022 the economy added 504k jobs, still much higher than the average prior to the pandemic. That number would slowly move lower throughout 2022 as noted above with November’s release. The trend is pointing to a decline, albeit a shallow one. The 12-month moving average stands at 408k. Despite “improvement”, the Fed would like to see more progress, which is why everyone is watching these numbers closely. Will they continue to trend lower and stay low? You will just have to wait for the numbers to know.

YESTERDAY’S MARKETS

Stocks could not hold on to overnight gains, falling in response to the ADP jobs number, considered a prelude to this morning’s big, official release. The S&P500 fell by -1.16%, the Dow Jones Industrial Average traded lower by -1.02%, the Nasdaq Composite Index dropped by -1.47%, and the Russell 2000 Index declined by -1.09%. Bonds fell and 10-year Treasury Note yields gained +3 basis points to 3.71%. Cryptos gained +0.44% and Bitcoin inched higher by +0.14%.

NEXT UP

• Change in Nonfarm Payrolls (December) is expected to come in with a +202k payroll gain after a +263k gain in November. This is the market mover of the day.
• Unemployment Rate (December) may have remained constant at 3.7%.
• ISM Services Index (December) is expected to have slipped to 55.0 from 56.5.
• Factory Orders (November) may have fallen by -1.0% after gaining +1.0% in October.
• Next week: Earnings season begins! Additionally, we will get Consumer Price Index / CPI along with University of Michigan Sentiment. Check in on Monday for weekly economic and earnings calendars for times and details.