2024-01-05 13:09:00 ET
Summary
- Nonfarm payrolls increase and unemployment rate remains at 3.7%.
- The ISM Services jobs component plunges to levels not seen outside of COVID and the Financial Crisis.
- Microsoft could surpass Apple as the world's biggest company.
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Payrolls up more than 200K and the unemployment rate holds at 3.7%. (0:15) But another jobs indictor hits crisis levels . (2:32) Microsoft could soon topple Apple as world's biggest company. (4:48)
The following is an abridged transcript:
Our top story today so far
The December employment report came in stronger than expected with some hotter wage inflation.
From an economic perspective the numbers are more evidence of a persistently resilient labor market, which could help achieve a soft landing. From a monetary policy perspective, it supports the action so far this year with traders second-guessing the aggressive rate-cut forecasts priced in last month.
Nonfarm payrolls rose by +216,000 in December. That was well ahead of the +170,000 economists predicted, although November and October saw downward revisions.
The unemployment rate held steady at 3.7%, where the forecast was for a bounce back to 3.8%. Average hourly earnings were up 0.4% for the month, a little hotter than the 0.3% consensus. Annual earnings growth rose to 4.1%.
Kate Bahn, researcher director at WorkRise notes one of her favorite jobs report indicators: 14 instances of the phrases "little changed" or "unchanged" in this report. She says that's "Demonstrative of chugging along," with her highest count around 17.
Guy LeBas, chief fixed income strategist at financial services firm Janney Montgomery Scott, says: "This is as strong an economy as one can reasonably expect - nothing too hot and nothing too cold - and yet we're all paranoid for the One Bad Thing that's certain to happen."
Markets had a knee-jerk reaction to what looks like a hawkish report from a Fed perspective. Stock index futures tumbled and Treasury yields jumped. But by the opening bell futures had wiped out losses and yields had cut gains.
The report "likely delays the timing" of Fed rate cuts, Jeremy Straub, CEO at Coastal Wealth says. "Clearly, the economy is strong enough as of now to withstand the Fed’s currently elevated interest rates."
Traders did rein in rate cut expectations. The chance of a March quarter-point hike moved below 60% and for the end of the year the odds are now closer to five cuts than six. But that is just continuing the trend that started this week.
But Tom Graff, CIO at financial services firm Facet, says: “I know stocks are focused on rate cuts … But I'm more focused on job gains remaining steady vs. continuing a downward trend. If you told me NFP would be 200k every month in 2024, I'd be levered long, Fed cuts be damned.”
The jobs report wasn’t the only economic indicator of the day, though. And from a trading perspective wasn’t the most important.
Stocks rallied after the December ISM services index came in softer than expected. And Treasury yields moved into the red.
The S&P ( SP500 ) and Nasdaq ( COMP.IND ) are up around +0.5%, but probably have too much heavy lifting to do to keep their weekly winning streak. The 10-year yield ( US10Y ) move back below 4%.
The ISM non-manufacturing PMI dropped to 50.6 last month, getting closer to contraction territory, which is below 50. The forecast was for it to stay about steady at 52.6.
But what really stood out was the plunge in the employment component to 43.3. That’s a level that hasn’t been since outside of COVID and the Financial Crisis.
Some comments highlighted by Wells Fargo: “Remote work is preferred for most, making it difficult to recruit skilled employees, and our skilled employees are leaving for hybrid options” and “Layoffs have increased in the professional services and staffing industries over the past several months as companies try to reduce cost amid the climate of economic uncertainty and decreasing customer demand.”
Wells Fargo’s economists say: “Taking these comments at face value suggests labor weakness could still be partially supply related, where skilled labor is challenging to find, but that there's also some cost-reduction starting to materialize in layoffs.”
Among active stocks
Jefferies downgraded Palantir Technologies (PLTR), saying the AI story surrounding it is "overhyped."
Analyst Brent Thill cut the stock to Underperform with a $13 price target, saying “we are concerned that the stock has rallied to unsustainable valuation levels primarily on the back of AI euphoria (and retail trading momentum) with no clear monetization strategy."
PayPal ( PYPL ) was hit by a second downgrade in two days. BTIG lowered the stock to Neutral from Buy, suggesting that the company is facing "too much uncertainty" and that there's longer road ahead to achieving profitability.
And BofA analyst Vivek Arya says Nvidia ( NVDA ) could generate roughly $100 billion in incremental free cash flow over 2024 and 2025. That, in turn, could be used to boost shareholder returns (between $30 billion and $35 billion) and acquisitions, he says. He has a Buy on the stock and a $700 price target.
In other news of note
Microsoft ( MSFT ) could be on the way to holding the title of the world’s most valuable company . Heading into today’s trading, Microsoft had a market cap of about $2.73 trillion, not far behind Apple’s ( AAPL ) $2.83 trillion.
Apple has held the crown since November 2021, but it has been down every session this year on worries about iPhone sales.
On the other hand, Microsoft has been forecast to be one of the AI favorites in 2024.
Looking at Seeking Alpha’s weekly Dividend Roundup
This week's dividend activity included increased payouts from Bank OZK ( OZK ) and Alamo ( ALG ) as well as declarations from companies like Johnson & Johnson ( JNJ ) and PNC Financial (PNC).
Next week, it’s a big one. AT&T ( T ) goes ex-dividend, as does Mastercard (MA).
And in the Wall Street Research Corner
Goldman Sachs is providing its outlook for commodities in 2024 .
Daan Struyven, who leads Goldman Research on the oil markets, says that elevated geopolitical uncertainty supports the hedging value of commodities.
Power and green metals ( GDX ) demand, as well as commodity supply, will be boosted by the rise of artificial intelligence.
In addition, decarbonization will likely require higher commodity indices “to attract much higher investment, and to compensate for higher demand uncertainty.”
Analysts see value in commodities and expect higher prices due to the improved cyclical backdrop.
For further details see:
Wall Street Lunch: Job Growth Chugs Along