AMKAF - What The Fed Will Do After The November Non-Farm Payrolls Report

2023-12-08 10:10:20 ET

Summary

• Nasdaq and S&P 500 gained nearly 5% in the last month, boosting investor optimism ahead of the NFP report.
• Job openings fell to lows not seen since March 2021, indicating a potential recession in 2024.
• The November NFP report showed a lower-than-average job increase, putting pressure on inflation rates and suggesting influencing the Fed rate policy decision.

In the last month since the last job report , Nasdaq ( QQQ ) and the S&P 500 ( SPY ) both gained nearly 5%. Investors grew increasingly bullish when the Fed did not change interest rate levels . Ahead of the non-farm payrolls report for November, the U.S. Labor Department's Job Openings and Labor Turnover Survey posted an unexpected drop. In addition, the ADP National Employment report indicated a cooling in job creation.

What do the JOLTs and ADP report mean for the economy and Fed rate policy?

Before analyzing the NFP report, let's look at the JOLTs report first.

Job Openings Fell

Job openings fell from 9.35 million in October to 8.733 million last month . This number is at lows not seen since March 2021. Job openings fell in health care, finance and insurance, real estate, and social assistance. Job openings increased in information.

The ADP report indicated job creation in restaurants and hotels. Private sector employment increased by 103,000, below expectations of a 113,000 increase. Annual pay gained by 5.6% Y/Y. This is at the slowest pace of increase since September 2021.

The JOLTs report and weaker ADP report both suggest a greater chance of a recession in 2024.

What does the NFP report tell us?

NFP Revisions

Readers should review the job data revision from previously issued reports first. The Bureau of Labor Statistics revised the change in total nonfarm payroll employment for September down by 35,000, from +297,000 to +262,000. It reaffirmed the change for October remaining at 150,000. The net employment in September and October combined was 35,000 more than previously posted.

The slightly lower job additions would support the Fed's decision from its last policy meeting not to raise interest rates. Unfortunately, the latest NFP report undermines that assumption. Bond yields are rising in response. The 10-year Treasury bond yield ( US10Y ) is up 2.62% at the time of writing.

November NFP Employment Increased

In November, nonfarm payroll employment added 199,000, pushing the unemployment rate down to 3.7%. The job increase is below the average monthly gain of 24 0,000 over the last 12 months. The return of workers from a strike skewed the data as employment increased in manufacturing (+28,000).

Jobs increased in health care (+77,000) compared to the average gain of 54,000. It also increased in ambulatory health care services (+36,000), hospitals (+24,000), and nursing and residential care facilities (+17,000).

Income investors will know by now that healthcare-related REITs are not ideal investments. Medical Properties ( MPW ) shares lost 58.5% in value YTD. The stock offers deep value and profitability. Despite a revision grade rising from D+ to A, bears accumulated a short interest of 23.98%.

Government employment is a source for skewing NFP figures. It increased by 49,000, though still below the average monthly increase of 55,000 over the prior 12 months. Local government employment continues to trend higher, up 32,000, and state government, up 17,000.

Readers are encouraged to consider investing in government sectors supporting the aerospace and defense industries. This is despite the White House warning that military funding for Ukraine is nearly gone . For example, RTX ( RTX ) shares bottomed at below $70 after markets priced in the Pratt and Whitney engine recall costs. The US Special Operations Command awarded the firm with a $321 million contract.

L3Harris ( LHX ) is optimizing its national security, technology-focused portfolio . Shares bottomed at close to $160 before trading recently at $196.68. Still, the stock trades at a premium, scoring a D+ on value. In return, investors get a stock with a B+ in profitability.

Manufacturing jobs rebounded by adding 28,000 jobs, lifted after striking workers returned. It benefited from a 30,000 increase in motor vehicles and parts. Investors should consider fundamentally strong firms like AutoZone (AZO). The company reported same-store sales increasing domestically, internationally, and on a total company measure . In contrast, CarParts ( PRTS ) posted weak sales and higher quarterly losses .

The economy added 40,000 jobs in leisure and hospitality, mostly in food services and drinking places. Speculation that obesity drugs from Novo Nordisk ( NVO ) and Eli Lilly ( LLY ) hurting "bad" food demand is greatly exaggerated. While the pivot trade out of Covid stocks (2020-22) into obesity drugs is in play, food stocks rebounded, too. McDonald's ( MCD ) shares are up 16.7% from 52-week lows.

November 2023 Job Declines

Retail trade employment fell by 38,000. Department store jobs declined by 19,000. Furniture home furnishings, electronics, and appliance retailers fell by 6,000 over the month. Stock traders should notice that the rebound in Macy's ( M ) and Gap ( GPS ) contradict the bearish job losses in the sector. Since GPS stock soared by 30% after posting strong Q3 results , job declines in retail trade may slow. Anticipate an increase in temporary hiring through the holiday season.

Jobs did not change by much in transportation and warehousing, down by 5,000. However, it fell by 61,000 since its peak in October 2022. At a macro level, investors who held ZIM Integrated Shipping ( ZIM ) are acutely aware of the decline in international shipments. A.P. Moller - Mærsk A/S ( AMKBY ) lowered its guidance when freight rates fell.

Anticipated Fed Decision

The market traded lower in pre-market in response to the report. Bond yields rose across the board. The market is re-pricing for the strong jobs report. Traders should expect the Fed to stay firm on current interest rate levels.

The strong jobs report and wage increase add pressure to inflation rates. Higher wages lead to persistent inflation. In November, average hourly earnings increased by 0.4% to $34.10. It is up 4.0% over the last 12 months.

Your Takeaway

The returning workers from the strike and the increase in government employment are the key takeaways from the NFP report. It dampens the media-driven hype of rate cut hopes. Expect the Fed to keep rates unchanged in its meeting next week, with a hawkish bias.

Stock markets efficiently priced in the chances of unchanged interest rates. As a result, investors may increase holdings in U.S. treasuries, add equity, and hold plenty of cash in money market funds.

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