US Non-Farm Payrolls (NFP), or employment numbers, came in hotter than expected indicating a robust labour market. Unexpectedly. The stock market reaction? A sell off. Good news is bad for the markets while bad news is good for the market. I will explain this below, but first, let’s break down today’s data.
US employment numbers for the month of November beat expectations unexpectedly. Here is a summary of the data:
- Non-farm payrolls: +263,000 vs. +200,000 expected
- Unemployment rate: 3.7% vs. 3.7% expected
- Average hourly earnings, month-over-month: +0.6% vs. +0.3% expected
- Average hourly earnings, year-over-year: +5.1% vs. +4.6% expected
October’s payroll was also upwardly revised to 284,000 from 261,000 previously. The takeaway is that the employers continue to hire even when the Federal Reserve is aggressively raising interest rates.
US markets sold off to open the day in reaction to NFP numbers, but are now slowly drifting back higher at time of writing.
More importantly, we are currently seeing a pop in the US 10 year yield, and a brief pop in the US Dollar.
So why a drop in markets from good news? All about the Federal Reserve, inflation expectations, and interest rates. Oh, and recession fears.
Just a few days ago, Fed chair Jerome Powell got stock markets excited as he said that the Fed could be slowing down the pace of rate hikes, even as soon as the upcoming December 14th meeting. The markets are seeing this as a December 50 basis point hike rather than 75, and the Fed beginning to be dovish rather than aggressive. I must say that Powell did still say that interest rates will still have to head higher until signs of progress on inflation are evident. The Fed will stay the course and continue to raise rates, but maybe in smaller basis points.
Markets did not carry momentum forward as they awaited today’s NFP numbers. With the labour market being robust, it indicates a strong economy. This is key because many have been talking about a recession and thus, the Fed having to pause interest rate hikes or even start cutting sometime in 2023 when a recession hits. Powell has said he sees no signs of recession because the labour market remains strong. Today’s data backs his argument.
The markets now see this as a sign that the Fed will likely not slow down on raising interest rates steadily.
Forget about determining whether the Fed will raise interest rates by 50 basis points or 75 basis points. The key thing for investors and traders is what will be the terminal rate. Judging by this data point, interest rates could head much higher. Perhaps higher than 5%.
But it gets a bit worse when it comes to inflation. This is due to wages climbing to 5.1% on an annual basis.
“A stronger-than-expected jobs report illustrates the wage problem that the Federal Reserve is facing,” Independent Advisor Alliance Chief Investment Officer Chris Zaccarelli said in an emailed note. “Average hourly earnings continue to climb and that wage pressure, in conjunction with low unemployment, will keep inflationary pressures elevated.”
“For those that believe the Fed will be cutting rates next year, we would remind them that inflation wasn’t transitory, and this jobs report is another example of why the Fed is going to be fighting inflation for a much longer period than many currently expect,” he added.