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Labor Market Data Leaves Fed (And Market) In A Pinch

Posted January 5, 2023 at 3:02 pm
Patrick J. O’Hare

Santa Claus ultimately found his way to Wall Street thanks to a positive showing yesterday that resulted in a net gain of roughly 30 points, or 0.8%, for the seven-day trading stretch that began December 23. The positive disposition for this period has, historically, often been a good sign for the start of the year.

Importantly, it is not a sure-fire sign that the stock market will start the year on a good note, as last year demonstrated to all market watchers, so one can interpret things as they so choose.

We can see this morning that Santa’s good cheer is not carrying over in pre-market trading. Currently, the S&P 500 futures are down 21 points and are trading 0.6% below fair value, the Nasdaq 100 futures are down 69 points and are trading 0.6% below fair value, and the Dow Jones Industrial Average futures are down 167 points and are trading 0.5% below fair value.

The backtracking has a lot to do with concerns that the Fed will keep frontrunning the likelihood of more rate hikes because of the enduring strength of the labor market that threatens to keep wage-based inflation pressures on the high side.

We learned in the FOMC Minutes yesterday that Fed officials certainly aren’t frontrunning the likelihood of rate cuts in 2023. On the contrary, “no participants anticipated that it would be appropriate to begin reducing the federal funds rate target in 2023.”

The labor data this morning won’t change that thinking.

The ADP Employment Change Report for December showed private sector employment increased by 235,000 jobs in December ( consensus 148,000). That was much stronger than expected and up from 127,000 in November.

Separately, initial jobless claims for the week ending December 31 decreased by 19,000 to 204,000 ( consensus 225,000). That is the lowest level of initial claims since September. Continuing jobless claims for the week ending December 24 decreased by 24,000 to 1.694 million. 

The key takeaway from the report is that the low level of initial claims — a leading indicator — is a telltale sign of a tight labor market that is going to keep the Fed on edge about inflation remaining elevated in spite of some other signs of weakening in the broader economy.

And there were more signs on that front this morning, starting with (AMZN) announcing that it plans to cut approximately 18,000 jobs, Bed Bath & Beyond (BBBY) issuing a going concern warning, and a sharp narrowing in the November trade deficit that was the result of exports and imports (but particularly imports) being less than they were in October.

Specifically, the trade deficit narrowed to $61.5 billion in November ( consensus -$76.4 billion) from an upwardly revised $77.8 billion (from -$78.2 billion) in October. That is the smallest trade deficit since September 2020 and it was the result of exports being $5.1 billion less than October exports and imports being $21.5 billion less than October imports.

The key takeaway from the report is that the weakness in exports and imports speaks to weakening global demand, yet the sharp drop in imports speaks to weakening demand in the U.S. economy following prior inventory building.

In brief, this morning’s reports were the worst combination as it relates to the market’s concerns about monetary policy. Strong labor market data combined with weak trade data will exacerbate concerns about the Fed continuing to raise rates — and keeping them higher for longer — potentially making a policy mistake that translates into a hard economic landing.

The 2-yr note yield, at 4.38% in front of the reports, has climbed to 4.46%, up nine basis points for the day. The 10-yr note yield, at 3.69% in front of the report, hit 3.75% before slipping back to 3.73%, up two basis points for the day.

Originally Posted January 5, 2023 – Labor market data leaves Fed (and market) in a pinch

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