PARA - Wall Street Lunch: Jobs Buck Soft Data Trend

2023-12-08 14:01:00 ET

Summary

• November jobs report shows renewed labor market strength and unexpected drop in unemployment rate.
• Market expects Fed to cut rates in 2024 despite positive economic numbers.
• GameStop's management team can now invest excess cash, raising concerns among investors.

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The unemployment rate surprises, falling to 3.7% . (0:15) Is GameStop trying to morph into Berkshire Hathaway? (2:59) Paramount surges on sale chatter . (4:51)

This is an abridged transcript

Our top story so far

The recent trend of weak economic numbers ended this morning with an impressive November jobs report.

The latest figures showed some renewed labor market strength that keeps a soft landing in play while giving the Fed a little more optionality than what the markets were pricing in since the CPI.

Nonfarm payrolls rose by 199,000 last month , up from 150,000 and topping expectations for a rise of 180,000. And the unemployment rate unexpectedly fell to 3.7% from 3.9%.

University of Michigan economist Justin Wolfers notes that "The household survey shows that employment grew by a blockbuster +747k. That's why the unemployment rate fell so sharply," but adds "this is a noisier survey, so less well suited for measuring month-to-month changes."

Adding to the dovish tone, wages came in a little hot, with average hourly earnings up 0.4%, a tad higher than estimates.

SA Analyst David Alton Clark says "These numbers appear to reinforce 'soft landing' narrative. Regardless, the bottom line is the market has already decided the Fed rate hike cycle is over. At this point, it’s not a question of if, but when, the Fed will begin cutting rates in 2024."

After some immediate volatility following the release fed funds futures are now back to a coin toss on whether the Fed cuts as soon as March.

But Guy LeBas, fixed incomes strategist at investment bank Janney, says the numbers provide "another excuse for Fed to push back on cuts."

In the stock market, more benign inflation data wiped out the initial losses prompted by the jobs report.

The S&P (SP500), Nasdaq ( COMP.IND ) and Dow ( DJI ) little changed in very choppy action.

Treasury yields spiked up and then eased back a little. The 10-year Treasury yield ( US10Y ) is back above 4.2%, though.

Shortly after the opening bell, the University of Michigan reported a significant drop in consumer inflation expectations in its preliminary measure of December sentiment.

5-10 year expectations, which are watched by the FOMC, fell to 2.8% from 3.2% in November. That was well below the 3.1% consensus and matched the second lowest reading since July 2021.

Pantheon Macroeconomics called that the “most important number today,” with economist Kieran Clancy saying they expect “both short- and long-term inflation expectations to drift even lower over the next few months, making it more likely, at the margin, that the Fed starts cutting rates in the spring.”

Year-ahead inflation expectations plunged to 3.1% from 4.5% in the previous month. That was the lowest since March 2021 and sits a hair above the 2.3%-3.0% range seen in the two years before the pandemic.

The headline sentiment number surged to 69.4 from 61.3, reflecting a drop in gas prices and a jump in stock prices.

In other news of note

GameStop ( GME ) is the center of stock market conversation after its mixed Q3 earnings report was overshadowed by a nugget in its SEC filing indicating that Ryan Cohen and the management team can now buy shares of other companies with the retailer's excess cash.

Wedbush Securities analyst Michael Pachter said the GameStop board decision was one of the most insane moves the firm has ever seen.

He says: "Investors have a myriad of investment vehicles available to them and therefore do not need GameStop to act as a mutual fund. If GameStop truly believes in the value of its shares, it should use its excess cash to buy back stock."

Pachter called move alarming because it implies that management believes it will achieve better returns by buying equities aside from its own. Wedbush Securities has an Underperform rating on GME and 12-month price target of $6.

Ryan Cohen is the founder of Chewy ( CHWY ) and invested heavily in Apple ( AAPL ) and Wells Fargo ( WFC ) after he sold the online retailer in 2017. He also took a massive stake in the former Bed Bath & Beyond in 2022, took a stake in Alibaba ( BABA ) worth hundreds of millions earlier this year and is an activist investor in Nordstrom (JWN). He has expressed admiration for Berkshire Hathaway's Warren Buffett in the past.

Among active stocks

Honeywell ( HON ) agreed to acquire Carrier's (NYSE: CARR ) Global Access Solutions business for $4.95 billion in cash, which it said will enable it to become a leading provider of security solutions for the digital age. Honeywell said the deal supports its recently announced plans to align its portfolio to three key megatrends: automation, the future of aviation and energy transition.

Broadcom ( AVGO ) issued its outlook for 2024 , anticipating $50 billion in revenue and EBITDA margins of 60%. And while the company acknowledged some cyclical slowness in its broadband and storage semiconductor businesses, Wall Street believes the company should see strength in the back half of the year.

Paramount Global ( PARA ) is rallying amid the latest speculation about a company sale . David Ellison's Skydance Media is "kicking the tires" on Paramount's assets, according to a Puck News' report. Our editorial team says it's a real possibility since Skydance is well funded and is less likely to run into regulatory issues than rival media companies like Warner Bros. Discovery ( WBD ) or NBCUniversal (CMCSA).

Skydance is already a key partner for Paramount on Tom Cruise projects including the Mission: Impossible franchise and Jack Reacher film and TV adaptations.

In the weekly Seeking Alpha Dividend Roundup

We saw increased payouts from Mastercard ( MA ) and Bristol-Myers Squibb ( BMY ) as well as declarations from companies like Walmart ( WMT ) and Dell Technologies (DELL).

Next week, AIG (AIG), Devon Energy (NYSE: DVN ) and others will go ex-dividend .

Wrapping up in the Wall Street Research Corner

Are investors jumping the gun on the soft landing? J.P. Morgan strategist Marko Kolanovic says they should be more prepared for a recession where risk assets will likely underperform cash by 20% .

He says: "We see the arguments such as no landing, goldilocks, election year seasonality, labor market resiliency, up-rating of valuations, Fed put, etc., as various versions of ‘this time is different.’"

And highlights that recession risk is highest 14 and 24 months following a yield curve inversion, which would cover most of 2024.

"We think that the decline in inflation and economic activity that we forecast for 2024 will at some point make investors worry or perhaps even panic."

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