Strong labor data fails to crimp equity markets, dollar rallies

Stocks rallied from early losses this morning as traders weighed this morning's jobs report and positive consumer sentiment data all of which pointed to which pointed to a soft landing. Futures markets pushed out the much hoped for first rate cut to next summer echoing some Fed official’s mantra of ‘higher rates for longer.’ Predictably, bond yields and the dollar rose, while gold fell back from its peak.

TODAY’S MAJOR NEWS

Non Farm Payrolls ahead of expectations, still strong!

In a Non Farm Payrolls (NFPR) largely as expected, the increase in the workweek combined with a bigger than expected month-on-month increase in hourly earnings was the main take-away, suggesting that the labor market is tightening again: wage inflation remains quite sticky, combined with a lower unemployment rate and higher than expected job creation rate.

Fed fund futures had been pricing in expectations that we’ll see our first rate cut in March prior to the data release, but those odds are now backing down with no cuts likely until next June. The Fed has repeatedly said that it doesn’t want to make the same mistake it made in 1980 when it pivoted too soon, allowing inflation to come roaring back. As such, it has stated many times that it would rather error on the side of being too high for too long. It has further stated that it is most concerned with sticky inflation in the “super-core” data, which is largely driven by wage inflation, which remains quite sticky.

• The economy created 199,00 jobs in November, above analyst expectations of 180,000 up from 150,00 in October
• The unemployment rate fell to 3.7% in November, down from analyst expectations that it would remain at 3.9% but that was pretty much a guess given workers returning from recent strike action
• Private payrolls rose by 150,000 in November, matching analyst expectations, although the October number was revised to 85,000 and down from 99,000 previously
• The job participation rate ticked higher to 62.8% as expected
• The number of long-term unemployed slipped lower to 1.2 million people in November. The number of people employed part time for economic reasons fell by 295K to 4.0 million in November. These are people who want a full-time job, but they have been unable to find a full-time job, or they have had their hours reduced by their employer
• Average hourly earnings rose 0.4% month-on-month in November, up from analyst expectations of 0.3% gains, and doubling the pace seen in October
• The average hourly workweek rose to 34.4 hours, up from analyst expectations that it would remain unchanged at 34.3 hours

US consumer’s confident and expecting lower inflation

• The December consumer sentiment index surged to 69.4 in this morning's data release, well ahead of analyst expectations of 61.9, and up from 61.3 in November
• Expectations for year-ahead inflation plummeted from 4.5% last month to just 3.1% this month, a sharp shift in consumer perceptions about inflation going forward
• An increasing number of respondents citing expectations that next year's elections would result in changes that would be more favorable to the economy

TODAY’S MAJOR MARKETS

Russell 20000 leads rally

• The Russell 20000 as today’s market leader, up 0.6%, while the S&P 500 and NASDAQ were up 0.4%
• Global equity markets were mixed overnight, with the Nikkei 225 falling again, off 1.7% on fears that domestic interest rates would be hiked, while the Dax was up 0.8%, and the FTSE 100 was up 0.5%
• The VIX, Wall Street’s fear index, fell to 12.6

Bonds yields fall, Dollar rallies

• US bonds sold off, with 2- and 10-year yields rising to 4.73% and 4.25%, respectively.
• 10-year TIPS index-linked yields rose to 2.03%
• The dollar index rose 0.5% to 104.0
• Versus the dollar, Yen was off 0.5%, with the Euro and Sterling off 0.4%

Oil rallies, gold sees profit-taking

• Oil prices bounced on bargain hunting, up 2.8% to $71.3 per barrel
• Gold prices fell 1.5% to $2,016 per ounce, while Silver prices fell 3.0% to $23.3 per ounce
• The grain and oilseed sector is was stronger, responding to this morning's USDA WASDE crop report

Analysis by Arlan Suderman, Chief Commodities Economist: Arlan.Suderman@stonex.com

Market outlook by Paul Walton, Financial Writer: Paul.Walton@StoneX.com