Industrial, financial and tech shares led the gainers – seven of the top 10 major sectors rose on the session.
Basic material and energy stocks were the worst-performing sectors as the jobs report worried the dollar-carry traders (borrowing in dollars at rock-bottom rates and investing in virtually anything else). Concern that the Fed will end their zero-interest rate policy (ZIRP) sooner than previously thought will lead to some covering of those borrowed dollars – the dollar rallied as a result, and continues to this morning.
This concern over monetary policy was seen in the equity markets as stocks reversed course big time, moving to negative territory mid-morning after beginning the session higher by nearly 2%. The reversal shows that risk-trading strategies are more about easy money than economic fundamentals. In the final 90 minutes of trading the broad market recouped about a third of the day’s high-water mark.
While I wish the Fed would remove its emergency level of accommodation, gently bringing their benchmark rate to 0.75%-1.00%, the concern that the Fed is going to engage in a full-blown unwinding of their aggressive monetary easing is a premature concern. First, it is very normal for the unemployment rate to tick down before peaking. Second, once the jobless rate peaks, the average length of time with which the Fed begins to raise rates averages six months (shortest amount of time is one month, the longest is 22 months).
One thing is clear, if the dollar does trend higher on the belief the tightening is right around the corner, we’ll see just how directly the market’s upswing has been connected to the dollar carry trade by moves in the equity markets -- those shorting the buck will scurry to cover those positions and stocks will fall.
Volume on the NYSE Composite was the strongest in a month as 1.4 billion shares traded, roughly 16% above the six-month average – however, still below the norm of the 2004-2007 period.
Market Activity for December 4, 2009
November Jobs ReportSo that was the lead up, let’s get to the specifics.
The Labor Department issued a big surprise as it announced payrolls declined just 11,000 in November. This is well-below the consensus estimate of a 123,000 decline. Since the prior month’s report we’ve talked about the monthly change moving to the statistically insignificant level of < 100,000/month, but this occurred much quicker than expected. However, I’ll note that during the 1982 job-market contraction jobs printed a month of just -6,000 only to see large monthly losses ensue in the following eight months. This is in no way an attempt to compare the 1982 recession and job contraction to the current environment. Back then, both tax rates and interest rates were in the process of tumbling. This go around we’ll have the opposite working as a headwinds to this recovery. But I use this period just because it also showed an especially long stretch of large monthly job losses and a month of ease in between.
The previous two months of losses were revised up big time, showing 159,000 fewer jobs were lost than previous calculated.
In terms of industry, the goods-producing industries shed 69,000 (the preliminary ADP report was pretty inaccurate as it predicted 88,000 were lost), a large improvement from the prior month’s loss of 113K – and much better than the three-month average of 92K. The construction segment shed just 27,000 positions (29th month of decline), and improvement from October’s 56K decline – the three-month average is -45K. The manufacturing sector cut 41,000 positions (24th month of decline), a decent improvement from the -51K in October – the three-month average is -44K.
The service-producing industries added 58,000 positions – this is strange considering the ISM service-sector index continues to show positions are being cut (ADP was way off, estimating 81,000 were eliminated). The revision to October service-sector employment also showed a gain (a pick up of 2,000 positions), a huge upward revision from -61,000 reported last month. Trade and transportation cut 34,000 positions, much better than the 60K loss in October – three-month average is -50K. Retail cut just 15,000, up from -44K in October – the three-month average is -33K.
Business services posted a big increase of 86,000 jobs and temporary employment (a key indicator of future jobs gains) jumped 52,000, which follows an upwardly revised 44K addition in October. This marks the third month of increase for temp. hiring. We want to see temporary hiring increase, as it is generally an indication that permanent hiring is not that far behind. However, with temp making up so much of the increase in business services, 65% of the increase, I do wonder if firms are relying more on temp work as the uncertainty regarding the future cost of hiring the next worker is high. We’ll just have to wait a few months to ultimately find out.
Education and health-care continued to keep the ball rolling, this segment never endured even a month of decline during this entire contraction, as the segment added 40,000 positions. This matches the prior month’s gain and in line with the three-month average of +39K.
The unemployment rate ticked down to 10.0% from 10.2% in October (it was expected to come in unchanged) – a result of the decline in the labor-force participation rate. That is, more people removed themselves from the labor force as they did not look for work during the four weeks of this November survey. When laid-off workers begin to feel better about things and come back in to look for work, the jobless rate will rise again. A tick down in the jobless rate prior to a cycle peak, as mentioned above, is evident in almost labor-market downturn. This is the second move lower for the current cycle, the first being in July when the jobless rate fell to 9.4% from 9.5%.
The U6 unemployment rate (the underemployed rate as it includes discouraged workers and those working part-time because they can’t find full-time work) fell for only the second time in 20 months. It remains extremely elevated as it settled at 17.2% in November (down from 17.5% in October). This number was re-calculated in 1994 and based on the former methodology it sits at 13.7% -- the record of 14.3% was hit in 1982.
The worst aspect of the jobs report was the jump in the average duration of unemployment, up to 28.5 weeks from the 26.9 in October. This jibes with what the jobless claims data is suggesting – the pace of firings has eased greatly, but hiring is not yet occurring. This is a very very normal event, firms do not begin to hire this soon in the recovery, but the large increase in this reading (up from what was already a record level) shows that some aspects of the labor market are actually a little worse.
The average weekly hours worked reading bounced off of its record low, up to 33.2 from 33.0. This is nice to see, as the number needs to hone in on 34.0 before meaningful jobs gains ensue. The average over the past decade is 33.8
For stocks, the market may, as appeared to be the case mid-session on Friday, begin to worry that the end of ZIRP is near – it’s kind of that what’s bad is good environment we’ve been in as bad means ZIRP lives and good reminds the easy-money trade that ZIRP will be laid to rest. But while I keep harping on what’s in store when ZIRP is removed, traders shouldn’t get too worried just yet that the Fed will remove aggressive levels of accommodation.
The excitement over the jobs report did seem a little amateur to me. Again, after the huge job losses over the past two years (especially over the last 12 months) one has to assume some mild payroll additions will show up soon. However, and I don’t enjoy stating this, the labor market is very likely to remain troubled for an extended period and it is not reasonable whatsoever to believe that the normal job rebound of 200K-350K in monthly job creation will present itself (credit contraction, uncertainty over future employment costs, plenty of room to still stretch existing workers, a lack of final demand and big time trouble within state and local budgets are all serious headwinds for job creation).
So let’s hope that the months ahead prove the economy is close to ending job-slashing mode, but I fear we won’t see much in terms of job growth.
Today is the 68th anni of the Pearl Harbor attack – America’s wake up call to the axis threat.
Have a great day!
Brent Vondera, Senior Analyst
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