November’s employment report was a “Goldilocks” report, solid enough to reflect a vigorous labor market, but not strong enough to encourage the Fed to be more aggressive.
Hiring slowed to 155,000 in November, well below the 200,000 expected and under October’s 237,000 payrolls, after revisions. The unemployment rate was unchanged at 3.7 percent. Average hourly earnings, up 0.2 percent from October, were slightly below expectations but still resulted in gains at a 3.1 percent annual rate.
“It relieves the pressure on markets of a Fed that could over do it. This gives them license to take a break after the December hike,” said Peter Boockvar, chief investment strategist at Bleakley Advisory Group.
The dollar index erased its earlier gains after the report and was slightly lower. Treasury yields were lower after the jobs report, but turned briefly higher several minutes later on news of an OPEC deal that pushed oil prices higher. Yields move opposite price. The 2-year yield, most reflective of Fed policy, was slightly higher at 2.77 percent. Stock futures came off the morning’s lows, opened lower, but moved higher in morning trader.
The market has been looking for a reprieve from Fed rate hikes and while a December rate hike is expected, the fed funds futures show just one full hike for 2019. The Fed forecast has three hikes for 2019, but some strategists expect that number to come down after weeks of market turmoil and signs the economy will slow in 2019.
One area that remains strong, however, is the labor market. Traders have feared it will be a main driver for the Fed, pushing it to raise interest rates as unemployment continues to drop but other parts of the economy weaken. With revisions, job gains have averaged 170,000 per month over the last three months.
“These numbers aren’t going to move the dials for the Fed in either direction. This is the first time since Q2 2009 when you had average hourly earnings up 3 percent two months in a row,” said Ward McCarthy, chief financial economist at Jefferies. “The labor market is cranking away. This is not going to nudge the dial as far as the Fed is concerned.”
But the Fed has clearly been watching some of the same concerns reflected in the markets. Fears of a trade war remain an issue for the economy for next year, despite the ceasefire between President Trump and China. The housing market has slowed as interest rate hikes push mortgages near 5 percent for 30-year fixed loans.
Fed Chairman Jerome Powell has said recently the Fed would need to slow down if conditions are uncertain. He also said the Fed is close to neutral, a rate where the Fed no longer stimulates the economy and where it would likely pause in hiking. That threshold is a matter of debate, but some strategists believe it is two or three hikes away from the current 2.25 percent to 2.50 percent range on fed funds.
“This is a continuation of a narrative he’s been telling since August. When you get close to what they estimate is neutral, they’re going to go slower and be more cautious,” McCarthy said.
Ben Jeffery, a strategist at BMO, said the jobs report didn’t change the view on December.
“This does not recast the strong employment narrative. I think this report doesn’t incrementally change anything that hasn’t been discussed,” said Jeffery.
October’s payrolls were revised down to 237,000 from 250,000, and September payrolls gained by 1,000 to 119,000.
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