Do you want the job or not?

Stocks pulled back yesterday as investors took time to rest their animal spirits. Consumer durable inventories are down from a year ago which is healthy for retailers, maybe not so good for consumers and… prices.

Help wanted. Today marks the beginning of the queue leading up to Friday’s big monthly jobs number. The monthly number is always a chart topper, and it has become even more closely watched in the past few years. First, during the pandemic, the labor market was closely monitored for signs of recovery as the country struggled to get workers back behind the plough. During and immediately after the pandemic, the Fed often cited a weaker labor market as the reason for keeping rates lower for longer. With 20/20 hindsight, we know that rates did not only stay low for too long, but rather, they were ratcheted higher with eye-watering speed in 2022. And, wouldn’t you know it, the Fed was most concerned with a labor market that was too strong as being a key driver of inflation.

Not only is the unemployment rate low, but there are also plenty of jobs available. That type of scenario makes for a tight labor market. In order to fill vacancies, businesses must pay higher wages to incentivize job seekers to abandon their comfy couches to take up the shovel. Further, with so many job openings, businesses must also pay up to ensure that their workers won’t jump ship in search of higher wages elsewhere. You are probably thinking that this is a good scenario, and it is… for workers, but not for businesses. Higher labor costs mean lower margins, and nobody likes lower margins, so businesses solve the problem by raising prices to consumers. OH, OH, there it is… inflation. At least, that’s the way the Fed sees it.

We have economist Bill Phillips to thank for that. He first made the stunning revelation that wages are tied to the unemployment rate. Here is the citation from his seminal paper: Phillips AW. The Relation Between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861-1957. Economica (London). 1958;25(100):283-299. doi:10.1111/j.1468-0335.1958.tb00003.x . Here is the famous chart lifted straight out of Bill’s paper. I have included it so you can see it for yourself. This is the first item that new Fed members are given during their orientation.

This shows the inverse relationship between unemployment and wages. The chart below is the Unemployment Rate since the start of the pandemic. You can see how unemployment spiked in response to the pandemic and then fell back to almost pre-pandemic levels, which, I might add were at multi-decade lows already. So, we went from tight to slack, and back to tight. If you look really closely at the right-hand side of the chart, you may notice that there is a shallow, but positive trend emerging, which implies a weakening labor market. Given the chart above and chart below, you can see why the Fed would be interested in the health of the labor market. Therefore, if you are interested in what the Fed might be thinking, you would, naturally, be interested in the employment numbers. They start today with JOLTS Job Openings. Tomorrow, ADP will report Employment Change for November. On Thursday, we will get weekly Initial Jobless Claims, and on Friday, we will get the monthly numbers from the Bureau of Labor Statistics. The most watched of the series are the Unemployment Rate and Change In Nonfarm Payrolls. Markets are hoping for something unremarkable. If they show a labor market that is too healthy, please refer to the chart above. If they show rapidly decaying labor market, bets that the Fed will lower rates sooner may ensue. Markets may also interpret the weakness as being bad for the economy. At this point, the market is leaning towards a benevolent Fed, so anything that challenges that thesis could cause some… well, volatility. Stay tuned and stay focused.

WHAT’S GOING ON BEFORE THE MORNING BELL

CVS Health Corp (CVS) shares are higher by +1.93% in the premarket after the company released 2024 sales guidance that exceeded analysts' expectations. The company also announced a dividend increase while reiterating its 2023 full-year guidance. Dividend yield: 3.53%. Potential average analyst target upside: +28.1%.

The JM Smucker Co (SJM) shares are higher by +0.95% after the company announced that it beat EPS estimates for last quarter. It also lowered its full-year guidance; however, it is still in the range of median analyst estimates. In the past 30 days, 5 analysts have lowered their price targets while 8 kept targets unchanged. Dividend yield: 3.77%. Potential average analyst target upside: +14.2%.

YESTERDAY’S MARKETS

NEXT UP

• JOLTS Job Openings (Oct) is expected to show 9.3 million vacancies, slightly lower than the prior month’s 9.553 million openings.
• ISM Services Index (Nov) may have increased to 52.3 from 51.8.
• ST&P Global US Services PMI (Nov) is expected to be 50.8, in line with earlier flash estimates.