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December Employment Data Introduces Complicated Rate-Cut Equation

Posted January 5, 2024 at 9:45 am
Patrick J. O’Hare

The market’s nine-week win streak is at risk of coming to an end this week. There has been plenty of deliberation as to why that is, but the simplest explanation is that the market had a nine-week win streak, leaving it overextended on a short-term basis and due for a pullback.

Fittingly, many of last year’s biggest gainers, as well as many of the biggest gainers during the nine-week win streak, have been among the biggest losers to start 2024. To wit: the Philadelphia Semiconductor Index is down 6.4%, the Invesco S&P 500 High Beta ETF (SPHB) is down 4.6%, the S&P 500 information technology sector is down 4.2%, the Nasdaq Composite is down 3.3%, the Russell 2000 is down 3.4%, and the Vanguard Mega-Cap Growth ETF (MGK) is down 3.1%.

We didn’t mention bonds, but they’re not doing too swell either to begin 2024 following a huge rally to end 2023. Shortly before the release of the December Employment Situation Report, the 2-yr note yield was up 15 basis points in 2024 to 4.40% and the 10-yr note yield was up 15 basis points to 4.03%.

Following the release of the December Employment Situation Report, bond yields backed up even further and the equity futures sunk even lower. Why? Because there was some otherwise good news in the employment situation.

Nonfarm payrolls increased by a larger-than-expected 216,000; however, downward revisions for October and November led to 71,000 fewer jobs than previously reported. Still, the unemployment rate held steady in December at a remarkably low 3.7% and average hourly earnings growth ticked up to 4.1% year-over-year from 4.0% in November.

The key takeaway from the report is that it wasn’t weak, so the market is going to have to grapple with the notion that the Fed may not cut rates as many times in 2024 as the market had come to expect at the end of 2023.

 Notable headlines from the December Employment Situation Report:

  • December nonfarm payrolls increased by 216,000 ( consensus 162,000). The 3-month average for total nonfarm payrolls decreased to 165,000 from 180,000. November nonfarm payrolls revised to 173,000 from 199,000. October nonfarm payrolls revised to 105,000 from 150,000.
  • December private sector payrolls increased by 164,000 ( consensus 132,000). November private sector payrolls revised to 136,000 from 150,000. October private sector payrolls revised to 44,000 from 85,000.
  • December unemployment rate was 3.7% ( consensus 3.8%), versus 3.7% in November. Persons unemployed for 27 weeks or more accounted for 19.7% of the unemployed versus 19.4% in November. The U6 unemployment rate, which accounts for unemployed and underemployed workers, was 7.1% versus 7.0% in November.
  • December average hourly earnings were up 0.4% ( consensus 0.3%) versus 0.4% in November. Over the last 12 months, average hourly earnings have risen 4.1%%, versus 4.0% for the 12 months ending in November.
  • The average workweek in December was 34.3 hours ( consensus 34.4), versus 34.4 hours in November. Manufacturing workweek was little changed at 39.8 hours. Factory overtime was unchanged at 2.9 hours.
  • The labor force participation rate fell to 62.5% from 62.8% in November.
  • The employment-population ratio dropped to 60.1% from 60.4% in November.

The 2-yr note yield climbed as high as 4.47% in the wake of the report and is now at 4.45%. The 10-yr note yield hit 4.09% and is now at 4.06%.

Currently, the S&P 500 futures are down 11 points and are trading 0.2% below fair value, the Nasdaq 100 futures are down 45 points and are trading 0.3% below fair value, and the Dow Jones Industrial Average futures are down 79 points and are trading 0.2% below fair value.

The stock market and Treasury market, therefore, are on lower tracks in early trading, still contending with simple profit-taking efforts, but now also dealing with a more complicated rate-cut equation.

Originally Posted January 5, 2024 – December employment data introduces complicated rate-cut equation

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