Friday's jobs report is expected to show that the U.S. economy added 200,000 payroll positions last month, including 175,000 in the private sector. Those numbers would be the weakest since December 2020. but a few data points suggest that hiring may come in even softer. If so, that could spark an S&P 500 relief rally, while shrinking odds that the Fed will hike its key rate to 5% or higher.
The S&P 500 closed near a two-month low on Thursday, so there's some room for a bounce. Yet the minutes from last month's Federal Reserve meeting released on Wednesday included a not-too-subtle warning to investors not to bank on a sustained S&P 500 rally. "An unwarranted easing in financial conditions" could work against Fed policy and "complicate" efforts to restore price stability, the minutes said.
Jobs Report Expectations
The unemployment rate and wage growth are just as important as hiring to the Fed policy outlook. Projections released last month show the Fed expects the jobless rate to rise to 4.6% by the end of 2023 from the current 3.7%. Fed chair Jerome Powell has said wage growth needs to get down to about 3.5% to be consistent with the 2% inflation target.
Rate hikes are very likely to continue as long as the unemployment rate remains below 4% and wage growth close to 5%. Wall Street economists expect Friday's jobs report to show the unemployment rate holding at 3.7% as annual wage growth ticks down to 5% from 5.1%.
Average hourly earnings are expected to rise 0.4% on the month, following a 0.6% rise in November. The surprisingly strong gain in November was led by a huge 2.5% pay hike for transportation workers. That likely stemmed from the recent national rail labor negotiation, which granted an immediate 14% pay hike. However, another big transportation wage bump could come in December's jobs report, since only half of 12 unions approved the deal early enough to show up in November data.
Hiring Slows
Hiring has clearly downshifted, with the monthly pace of job gains averaging 272,000 in the three months through November. That's down from 374,000 over the prior 3-month period. However, the Labor Department's Job Openings and Labor Turnover Summary for November released on Wednesday pointed to further slowing.
Net hiring, or hires minus separations, fell to 185,000 in November from 355,000 in October and 431,000 in September. The net hires number for November lagged the 263,000 job gain indicated by the monthly employment report, but the latter was based on a midmonth employer survey.
The takeaway is that hiring momentum was fading in late November, and that probably carried over into December. That deduction is supported by weekly jobless claims data. While initial claims remain historically low, the number of people continuing to claim benefits has climbed steadily. In the week through Dec. 17, 1.7 million people received benefits, up from 1.5 million in the Nov. 5 week and 1.36 million as of Oct. 1.
While layoffs are still quite low, hiring appears to have slackened, making it harder for laid-off workers to quickly find new jobs.
Fed Rate-Hike Expectations
Heading into Friday's jobs report, financial markets are pricing in 61% odds that the Fed will downshift to a 25-basis-point rate hike on Feb. 1. Yet odds of another half-point hike jumped to 39% from 30% on Wednesday. That repricing likely reflected stronger jobs data released early Thursday. Payroll processor ADP estimated that private employers added 235,000 jobs in December vs. an upwardly revised 182,000 in November. Meanwhile, new jobless claims tumbled to 204,000 in the week through Dec. 31 from 223,000 the prior week.
Chair Powell has stressed that the pace of Fed rate hikes doesn't matter much. What matters, he says, is how high rates go and how long the Fed keeps them there. Yet the pace of hikes is a big deal for investors. That's because the Fed will be hard-pressed to keep hiking once job growth stalls 0r turns negative. If that happens before the Fed hikes above 5%, the U.S. economy may have a softer landing.
Will S&P 500 Support Hold?
After Thursday's strong jobs data, the S&P 500 fell 1.2% in stock market action. The Dow Jones Industrial Average lost 1% and the Nasdaq composite 1.5%.
With Thursday's pullback, the S&P 500, Dow Jones and Nasdaq are all close to testing recent lows, which could give way if Friday's jobs report surprises on the upside.
However, a softer-than-expected jobs report on Friday would likely provide some relief for the S&P 500, while boosting odds for a quarter-point rate hike at the Fed's next meeting. Still, a sustained S&P 500 rally is probably unlikely in the near term as recession clouds grow and Fed rate hikes continue.
Be sure to read IBD's daily afternoon The Big Picture column to stay on top of the prevailing market trend and what it means for your trading decisions.
