AI Optimism Propels Stocks Higher Ahead of an Integral Jobs Friday: Dec. 7, 2023

Tech shares are surging upward today following Alphabet’s release of a new artificial intelligence model and this morning’s better-than-expected initial and continuing unemployment claims. Against this backdrop, market participants are gearing up for a lighter-than-expected payroll number from the Jobs report tomorrow.

Trend of Labor Market Cooling Remains Intact

Unemployment claims were relatively unchanged last week, which was a shortened reporting period due to the Thanksgiving holiday. Initial unemployment claims increased to 220,000 for the period ending December 2, up from the previous week’s 219,000 but lighter than estimates calling for 222,000. Continuing claims for the week ended November 25, meanwhile, declined to 1.861 million from the preceding week’s 1.925 million. Analysts projected 1.91 million continuing claims for the most recent reporting period. Despite the weekly decline in continuing claims, the recent trend of the labor market softening is clear, especially when analyzing four-week moving averages. For initial claims, the four-week average of 220,750 increased by 500 from the four-week average for the period ended November 25. The four-week moving average for continuing claims for the period ended November 25 of 1.872 million also climbed, increasing by 7,000 from the previous week’s revised average. More significantly, it was the highest four-week average since December 11, 2021, when it was 1.888 million, which illustrates that a softer labor market is making it harder for out-of-work Americans to find new employment.

Equities Surge as Bond Investors Sit Tight

Risk-on sentiment is dominating market activity today, with stocks higher, the dollar lower, and bond yields near the flatline. All major U.S. equity indices are higher, with the 1.2% gain of the Nasdaq Composite leading while the S&P 500, Russell 2000, and Dow Jones Industrial indices are up 0.6%, 0.4% and 0.1%. All sectors are higher except for energy, health care and industrials, which are down 0.4%, 0.2% and 0.1%. Meanwhile, communication services and consumer discretionary are leading with gains of 2% and 0.9%. Bond land is quiet as traders await tomorrow’s big Jobs report for further direction on inflation and the Fed. The 2- and 10-year Treasury maturities are down 1 and up 2 basis points as they trade at 4.59% and 4.13%. The dollar is weaker as it loses value versus the yen, Aussie dollar, euro, pound sterling, and yuan, but it is gaining against the franc and Canadian dollar. The greenback’s index is down 44 bps to 103.70. Crude oil is near the flatline and is failing to recover from its recent battering. WTI crude is up $0.21, or only 0.3%, to $69.40 per barrel as traders continue to worry about sluggish global demand amidst a lack of appetite amongst some OPEC + members for further production cuts. 

Discount Retailers Face Increased Competition

Dollar General, which is a deep-discount retailer, reported mixed results for the recent quarter, with same store sales declining 1.3% year-over-year (y/y) as consumers reined in spending. On a positive note, an increase in stores and high traffic to the company’s locations caused overall sales to increase 2.4% y/y to $9.69 billion, but average ticket sizes declined. Dollar General’s earnings tanked 47% y/y to $276.2 million. While deep discounters are benefiting from overstretched consumers seeking low prices, they are also facing increased competition. Recently, Reuters reported that online retailer Temu, which is becoming well known for its bright orange shipping bags, has captured 17% of the off-price retailer market. 

A Stepping Stone or a Stumbling Block?

Tomorrow’s Jobs report is likely to provide additional indications of the labor market softening, a welcome sign for employers who have faced challenges with wage pressures and staffing with the right candidates. Its impact on markets, however, will depend on if investors view the data as a stepping stone to a March rate cut and soft landing or an adverse effect on consumer spending and a sharper economic slowdown.

I anticipate tomorrow’s report to show that new jobs in November slowed month-over-month from 150,000 to 140,000 with the deceleration resulting primarily from the manufacturing sector shedding workers. Manufacturing weakness was underscored by the November S&P Global Manufacturing PMI contracting after being positive for only one month this year. October was a breakeven month, sporting a score of 50, exactly at the contraction-expansion threshold. Meanwhile, the only positive month this year was April. The condition of manufacturing and weaker consumer spending is likely to push tomorrow’s unemployment rate up m/m from 3.9% to 4.0% while wage growth is likely to have progressed at an unchanged rate of 0.2%. Market direction tomorrow is likely to be driven by how much weight investors put on the increasing likelihood of a March rate cut against pessimism about declining consumer spending as the resumption of student loan payments and the depletion of pandemic era savings has caused households to tighten their purse strings. Indeed, investors may view the job market as a strong stepping stone to rate cuts that can support economic growth and corporate earnings, but they may also dismiss the benefits of an easing job market and instead focus on weakening consumer spending as a stumbling block to economic stability.