2024-01-05 09:55:59 ET
Summary
- U.S. economy adds 216k jobs in December, beating expectations.
- The unemployment rate remains unchanged at 3.7%.
- Average hourly earnings see the biggest jump since June 2023.
The U.S. economy added 216k jobs in December, the best since last September, and easily topping the consensus forecast of +175k. The two-month revision was -71k, however. The unemployment rate was unchanged at 3.7%, below expectations. Key for inflation, average hourly earnings were up 0.44%, also stronger than expected, and the biggest jump since June 2023. The year-on-year change in average hourly earnings was +4.1%, the best since September 2023, something the Fed does not want to see while the average workweek was 34.3, in line with estimates. The labor force participation rate was 62.5% - the lightest since January 2023 and down 0.3 percentage points from the previous month.
Digging into the report, private payrolls increased by 164k, ahead of what economists were forecasting, but that figure came off a downward revision in November. The U6 underemployment rate ticked up to 7.1% from 7.0%.
It was yet another report that featured massive downward revisions, so the BLS is clearly having issues gathering data - it should be noted that the JOLTS response rate also has been weak lately, so perhaps it is part of a broader trend. Bigger picture, robust employment growth backs up what we see in both initial and continuing jobless claims and with the monthly ADP private sector payrolls report. Finally, the household employment survey, used to calculate the unemployment rate, revealed a 683k job loss, the biggest since June 2020.
A Strong (Hot) December NFP Report Sparks Inflation Concerns
Unemployment Rate Steady, Jobs Gains Holding Near a +200k/Month Average
Average Hourly Earnings YoY Ticks Up in December
December Monthly Employment Change by Sector
The market reaction was negative. A hot set of earnings numbers puts the rate-cut outlook at risk. Equity futures dipped about half a percent in the moments after the December payrolls report hit the tape while the yield on the 10-year Treasury note (US10Y) jumped up to 4.07% - the highest in a few weeks. The US Dollar Index (DXY) also rose, continuing the trend that began at the end of last year. The odds of a March interest rate ease are now about 50/50. Just 127 basis points of cuts are now priced into 2024, down from above 150bps at "peak dovishness" last week.
This morning's NFP survey makes next week's December CPI report all the more important, as an uptick in core inflation could be in the works, pouring cold water on the cool-inflation outlook for 2024 so many strategists are counting on. Of course, real rates remain restrictive given that the Core PCE rate is at 1.9% on a 6-month annualized basis, and 5-year breakevens are near 2.2%.
Ongoing Negative Monthly NFP Revisions
NFP Job Change Breakdown: More Diversity in December
Focus on Fixed Income
Following the strong and inflationary December jobs report and ahead of the CPI update next week, let's focus on the broad US bond market. The Schwab U.S. Aggregate Bond ETF™ (SCHZ) is a fixed-income fund that seeks to track the total return of an index that measures the performance of the broad U.S. investment-grade bond market, according to Schwab .
SCHZ is a large exchange-traded fund, or ETF, with more than $7.5 billion in assets under management, and the current yield to maturity is near 4.65% following the bump-up in rates over the first few sessions of 2024. The ETF holds a mix of corporates and Treasuries, and the duration profile is mixed across terms. Seeking Alpha rates its share-price momentum as weak right now following the long-term downtrend off its 2020 peak, though the rally from the low in December has been strong. With a low 0.03% annual expense ratio , it can be an ideal holding for long-term investors seeking diversification from stocks. It also ranks well on various risk metrics while liquidity on the ETF is very strong.
Considering that the forward inflation outlook suggests modest rates, near 2.2% on both the 5-year and 5y5y segment of the maturity terms, investors can expect to earn near 2.4% in real dollars in SCHZ depending on default rates and losses given defaults. With a generally healthy employment backdrop at the moment and firms with sound balance sheets, I would expect that rate of return to play out for investors holding SCHZ to its current duration of about 6 years.
SCHZ: Portfolio, Duration Composition
The Technical Take
The US bond market remains generally rangebound. Notice in the chart below that SCHZ broke below its October 2022 low back in Q4 last year before surging to the close of 2023. The last several sessions have seen a move higher in yields , pressuring this bond ETF's share price.
With a flat 200-day moving average today, there is no clear trend, and that assertion is further underscored by resistance seen just shy of $48 while support lies in the $43s. Additionally, a high amount of volume by price from $43 to $48 may keep this range intact for a considerable time. What might concern the bulls, though, is that the RSI momentum gauge at the top of the chart has broken its rate of trend, suggesting that yields could press a bit higher from here.
Overall, the trend is neutral following last year's high bond market volatility.
SCHZ: Bonds Trendless to Start 2024
The Bottom Line
I have a hold rating on Schwab U.S. Aggregate Bond ETF™. I see the fund as a viable long-term holding given its low cost and strong liquidity metrics. Higher yields today also offer investors a positive real return, but we have yet to see a pronounced trend up in fixed-income prices despite the snap back off the October 2023 multi-year low.
For further details see:
A Strong December Jobs Gain Rekindles Inflation Jitters, SCHZ A Hold