Job Creation Surges; Rate Hike Back on Table

It’s never as good or as bad as you think. For the past few months, there has been a chorus of downbeat chants that the U.S. economy is headed for a downturn and that the job market was the leading indicator of the coming storm. The Cassandra’s cited the weak job creation numbers in August (+153,000) and September (+137,000), a sizable pullback in manufacturing and the much-feared hard landing in China. These doubters said that the Fed would have to wait at least until March 2016 to raise rates, in order to determine whether the slowdown was temporary or longer lasting. All of that changed when the government released the October employment report. The labor market bounced back in October, adding 271,000 jobs. It was the best pace of hiring this year and well ahead of the consensus estimate for 180,000. With this report, the three-month average increased by 20,000 a month to 187,000 and the 12-month average stands at 230,000.

The unemployment rate edged down to 5 percent, the lowest level since April 2008 and the broader measure of unemployment, which includes those who have stopped looking as well as those working part-time for economic reasons, edged down to 9.8 percent. While that’s still a hefty number, it is the first time that it's been below 10 percent since May 2008. And average hourly earnings increased by 2.5 percent from a year ago, the fastest year-over-year pace since 2009. If maintained, the extra money could potentially help consumers feel more economically secure and spend more freely.

Before you start the celebration, there is no doubt that the jobs market is not a-ok for everyone. Manufacturing has slowed down, due to plunging energy prices, weakness in China and the emerging markets and a strengthening U.S. dollar. One manufacturing executive based in MN, told me that the sector was in “a second recession.” Indeed, various indicators show that output, although still barely positive, is at the weakest pace since 2009. But there are signs of improvement on the horizon: there has been evidence of a near-term bottoming of Chinese (the Shanghai Composite has gained more than 20 percent since its low in late August) and other emerging economies and commodity prices have stabilized.

In fact, the firming global situation, along with the stronger than expected jobs report, now puts a December Fed rate hike back on the table. Just two weeks ago, the futures markets saw only a 30 percent chance of a December lift-off. A day before the jobs report, that number was over 50 percent and moments after the BLS release, it jumped to over 70 percent.

But as a reminder, the month-to-month numbers can change on a dime and it is really never as bad or good as you think…although the economy appears to be firming, sentiment could quickly sour again. For now, enjoy the good news.

MARKETS:

• DJIA: 17,910 up 1.4% on week, up 0.5% YTD (6th consecutive weekly gain, up nearly 10% during that period…largest six-week gain since 2012)
• S&P 500: 2,099 up 1% on week, up 2% YTD
• NASDAQ: 5,147 up 1.9% on week, up 8.7% YTD
• Russell 2000: 1200, up 3.2% on week, down 0.4% YTD
• 10-Year Treasury yield: 2.32% (from 2.09%)
• December Crude: $44.29, down 5% on week
• December Gold: $1,087.70, down 4.7% on week
• AAA Nat'l avg. for gallon of reg. gas: $2.22 (from $2.18 wk ago, $2.95 a year ago)

THE WEEK AHEAD:

Mon 11/9:

Tues 11/10:

6:00 NFIB Small Business Optimism

Weds 11/11:

Thurs 11/12:

10:00 Job Openings and Labor Turnover Survey (JOLTS)

Fri 11/13:

8:30 PPI

8:30 Retail Sales

10:00 Consumer Sentiment

Feb Job Growth Strong, Wage Growth Pokey

After a slight delay, the Labor Department reported that the economy added 295,000 jobs in February, ahead of estimates for 230,000 and better than the average monthly gain of 266,000 over the past year. January’s result was revised down by 18,000 but December’s strong 329,000 was unchanged. Even with the downward revision, payrolls are still rising at a three-month average of 288,000 a month. There is no doubt that job creation has kicked into a higher gear over the past year. A total of 3.3 million jobs were added, the highest year-over-year gain since the end of the 1990s. Meanwhile, the unemployment rate slid to 5.5 percent from 5.7 percent, due to a 178,000 decline in the labor force. The BLS noted that the labor force participation rate, at 62.8 percent, “has remained within a narrow range of 62.7 to 62.9 percent since April 2014.” Economists have attributed at least half of the more than three percent decline in the participation from pre-recession levels to the demographic trend of the retiring baby-boom generation. The rest of the drop reflects a deep jobs recession, which prompts disgruntled workers to give up their search. In her recent Congressional testimony Fed Chair Janet Yellen said that the low participation rate continues to suggest, “some cyclical weakness persists.”

The problem for Yellen is that the unemployment rate is now at the top end of the Fed’s 5.2 to 5.5 percent estimate of the natural rate. As a matter of policy, when the rate falls into the “natural” range, the central bank would start to increase short-term interest rates. But Yellen has also noted that wage growth would be a factor in the Fed’s decision on lift-off of rates.

Despite healthy job creation, average hourly earnings advanced by just 2 percent in February from a year earlier, stubbornly slow progress. Wages grew at a better than 3 percent rate annually during the prior recovery that ended in 2007. Economist Joel Naroff believes that wage growth is a lagging indicator “and with major employers announcing pay increases, it is only a matter of time before wages, however we measure them, increase faster.”

The long-awaited jump in wages could be coming sooner rather than later, according to the Financial Times. The fact that younger employees are seeing better growth; and lower wage earners are seeing a moderate improvement in incomes, “could be a harbinger of stronger earnings across the economy.” Analysts at Capital Economics say if the Fed waits until wage growth rises at a more normal pace, it risks being “well behind the curve.”

Meanwhile, investors threw a little tantrum on Friday, after the stronger than expected jobs report got some thinking that the Fed would be forced to raise rates at the June meeting. Stock indexes were down 1 - 1.5 percent and bond prices slumped. At some point, these knee-jerk reactions will stop and everyone will realize that more normal interest rate policy would indicate a healthier economy.

We'll hear more about the potential timing of rate increases at the next Federal Reserve policy meeting on March 17 and 18. One clue that the central bankers might increase rates as soon as June would be the removal a key phrase in the accompanying statement. If the Fed is no longer "patient" as to when it will consider hiking rates, we could see a June lift-off. BUCKLE UP!

MARKETS: Last week there was little fanfare over the NASDAQ reclaiming 5000 after 15 long years. Perhaps investors might feel a bit better when they reflect on the 6-year anniversary of the bear market lows, which occurred on March 9, 2009 (see stats below).

• DJIA: 17,856, down 1.5% on week, up 0.2% YTD
• S&P 500: 2071, down 1.6% on week, up 0.6% YTD
• NASDAQ: 4927 down 0.7% on week, up 4% YTD
• Russell 2000: 1217, down 1.3% on week, up 1% YTD
• 10-Year Treasury yield: 2.24% (from 2% a week ago)
• April Crude Oil: $49.62, down 0.3% on week
• April Gold: $1,164.30, down 4% on week
• AAA Nat'l avg for gallon of regular Gas: $2.46 (from $2.40 week ago, $3.45 a year ago)

THE WEEK AHEAD:

Mon 3/9: 6th Anniversary of Bear Market Lows

Here’s where we stood 6 years ago--since then, the broad S&P 500 has gained 150 percent, on an inflation-adjusted basis (dividends not included).

• Dow: 6547 – lowest level since April 15, 1997
• S&P 500: 676 – lowest level since Sept 12, 1996
• NASDAQ: 1268 – lowest level since Oct 9, 2002

Tues 3/10:

9:00 NFIB Small Business Optimism

10:00 Job Openings and Labor Turnover Survey (JOLTS)

Weds 3/11:

Thurs 3/12:

8:30 Retail Sales

8:30 Import/Export Prices

10:00 Business Inventories

Fri 3/13:

8:30 PPI

10:00 Consumer Sentiment