December’s Employment Report and Powell’s “patience” thread the needle

US equity futures trade higher in the overnight. Last Friday was a significant day for markets for obvious reasons (a monthly gain of +312K in the employment report), but also for reasons that may seem counter-intuitive (3.9% unemployment rate). The December Employment report reflected both a revision higher for November and a significant beat. The top-line beat in the initial reading for December caught the street by surprise – as was evidenced by the rally that materialized on Friday. However, it was not the top line beat alone that fueled the sharp move higher that we witnessed on Friday. Adding to the run-up in prices was the fact that the unemployment rate rose to 3.9% in December from November’s 3.7%.

Normally a rise in the rate of the unemployed would be considered a data point of justification for those calling for an approaching end to our long-running economic cycle, but this case was different. Why? In looking deeper into the report, it is clear to see that the report also included meaningful wage gains as outlined in today’s themes, continued employment gains in manufacturing, despite the fears associated with trade/tariffs concerns and cycle end, and very importantly, a tick higher in the Labor Force Participation Rate (LFPR).

With the tick higher in the LFPR found in the December Employment Report, from November’s 62.9% to 63.1%, it now stands at a near 66-month high. As the chart above ( also illustrates, since bottoming out in the second half of 2016, the LFPR has managed to level off in a meaningful way for the first time since 2000 – over the last two years. A longer term perspective on the LFPR speaks volumes.

The higher December LFPR reading illustrates that a higher percentage of the working age population is actually in the workforce. As the economy continues to expand, workers continue to roll into the workforce – workers considered long-term unemployed. It will be interesting to see whether that figure continues to inch higher in coming months and quarters.

Another data point within the employment report worth focusing on is the official unemployment rate. In this case, the rate rose .2% from November to December. That rise in the unemployment rate may potentially act to provide, in part, a data-centric backstop in the event the Fed does refrain from additional tightening in coming months. As I have indicated in this note in recent weeks, my sense is that the Fed will hold off on any further tightening until June 2019.

The shift in Fed Chair Powell’s posture on rates from two weeks ago has breathed life into the market because if the Fed is in fact patient and data-driven, most on the street would consider any additional tightening in the near term to be unlikely.

The combination of December’s unexpectedly strong employment gains in conjunction with Chair Powell’s apparent effort to assuage investors over further tightening in coming months helped put a soft floor under the market for the time being. Whether that floor holds will be determined in large part by the results of trade talks with China, analysis of ongoing economic data releases, and Q4 corporate results – which begin in earnest next week.

This week’s economic calendar, though light, will be very closely watched by investors. On Tuesday the focus will be on International trade data – with an eye on the impact of trade tariffs – both current and expected. On Wednesday investors will be focused on the EIA Petroleum Status Report with a focus on inventories and to what degree consumption is keeping pace with production at these depressed crude prices. As indicated in the themes of today’s note, Saudi has already made good on its promise to reduce production. It has also pushed prices higher for crude bound for the U.S. At a minimum, those two moves should put a floor under crude for the near-term. Also on Wednesday, the FOMC Minutes from the last meeting of 2018 are released. Given Chair Powell’s speech last Friday and his scheduled speech this week, this backward-looking release will be less potentially market moving than is normally the case. Weekly Jobless Claims, released on Thursday, are expected to come in at near cycle lows again. Econoday consensus is calling for 220k.

The two highlights of this week’s economic calendar are Jerome Powell’s speech on Thursday and the CPI reading for December, released on Friday morning. In the case of Chair Powell, investors will be looking for additional support for a patient and data-driven based outlook moving forward. In the case of December’s CPI, Econoday consensus is calling for a benign reading of 0.1%. Given the centrality of consumer prices on inflation and monetary policy, a flat November reading in conjunction with a scant 0.1% rise in the CPI report in December, there will be additional support for the increasingly widely held view that there will be no additional tightening in Q1.

Q4 earnings season gets underway in a week. As is customary, financials are the first sector to report. Citigroup (c), JPMorgan (JPM), Wells Fargo (WFC), and Goldman Sachs (GS) will be reporting. We will also be hearing from Constellation Brands (STZ), Bed Bath and Beyond (BBBY), and homebuilder Lennar (LEN).


Though last week’s dramatic reversal in U.S. equity market prices was quenching for parched investors and money mangers thirsty for something to feel good about, markets remain vulnerable to additional spikes in volatility and violent price swings in coming weeks. On the plus side, we did see markets move decidedly higher from the lows established by all three major equity market indices on December 24. Importantly, since December not only have those equity index prices rebounded, but as the 1-year S&P 500 chart below illustrates, on days where prices rose, volume expanded  – an indication that institutions have participated in the rebound. On days where prices fell, volume contracted.

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