Halyard’s Weekly Wrap – 12/8/23 – Firm employment statistics forces Bond bulls to double clutch

This morning’s employment report delivered a curveball to market participants who had been looking for continued economic moderation.  That was not to be the case.  The economy added 199,000 new jobs in November, up from the previous month and 14,000 more than the consensus had been expected.  Average hourly earnings rose 4.0% year-over-year, as it did the prior month.  But what really grabbed the investor’s attention was the downtick in the unemployment rate, which came in at 3.7%, 0.2% below the previous month.  The large change in household employment, 747,000 new jobs reported, and the change in the size of the workforce, 532,000 new entrants, was responsible for the decline. 

On the eve of the report, market consensus was that the economy had slowed enough that the Fed would be done with the rate hike cycle and Fed Fund futures were forecasting 100 basis points of cuts by next fall.  That’s been tempered by 16 basis points, but nearby futures still indicate that investors think the Fed is done. 

Later on Friday the University of Michigan inflation survey for the coming year brought welcome news.  Consumers are expecting inflation to average 3.1%, that’s down sharply from the 4.5% expectation last month and certain to be a welcome indication to the Federal Reserve members.   

Next week is packed with economic data and could heighten volatility.  On Tuesday we’ll be watching the CPI to see if it is in line with the Michigan survey results.  On Wednesday, we get a PPI and a rate decision by the FOMC.  We’d be shocked if the committee did anything other than leaving the rate unchanged.  Thursday, we’ll get a peek at how holiday sales are shaping up with the retail sales report for November.  The current expectation is that the measure will fall from the previous month, but we think that economists are too low in the forecasts.  Anecdotally, it seems like retail activity is humming.