BMA Market Insights: Nov. Jobs Report Reflected Continued U.S. Economic Momentum

Volatility continues with technical concerns around a 2Y-10Y bond yield curve inversion, the Fed’s rate hikes, and geopolitics around U.S.-China trade talks. Investors are heavily trading both sides as equity futures continue to whipsaw but currently poised to open higher with the Dow +0.02%, S&P 500 +0.03%, and Nasdaq +0.17%. Both U.S. Treasuries and interest rate swaps are higher this morning with the 10-year U.S. Treasury +0.0084% to 2.861% and the 10-year swap rate +0.028% to 2.914%.

GBP/USD is plummeting this morning, -0.85% to 1.26257 bid, as it is expected that Prime Minister Theresa May will cancel tomorrow’s scheduled vote in Parliament regarding the Brexit proposal as it is believed that the bill will not pass.

Last week, the jobs report showed that the U.S. unemployment rate remained steady in November at 3.70%, a 49-year low. While payrolls came in lower-than-expected, the data reflected continued economic momentum in the U.S., hiring remained strong with employers adding more than 200k jobs in four of the last six months, despite volatile markets and trade tensions (see more below). Fed officials supported a gradual pace of rate hikes depending on the economic outlook both pre- and post the jobs report.

The markets have largely priced in a December rate hike by the Federal Reserve who meets on December 18th and 19th, although how officials deliver that hike and their economic projections will remain the focus. A more dovish tone may be expressed in light of both global growth and benefits of fiscal stimulus waning and with inflationary pressures benign. Alternatively, the Fed may keep their projections fairly consistent with their outlook from their September meeting (with three more rate hikes penciled in for 2019), given strong economic fundamentals, particularly low unemployment. And while wild swings in equity markets may reflect fears about the economy, Fed Chairman Powell, himself, recently noted that such moves did not pose a risk to financial stability, signaling the declines would not deter the Fed from doing its job.

Nevertheless, general trade tensions and continued concerns surrounding global growth fed a RISK-OFF mentality throughout last week, driving Treasury yields lower, with the 10-year Treasury hovering around 2.854% towards the end of the week.

The stock markets had another tumultuous week, with trade tremors driving major U.S. indices down. The S&P 500 dropped about 4.6% over the week, the biggest weekly decline since March. The index closed the week near 2,633. Similarly, Dow Jones Industrial Average fell more than 1,000 points over the week, closing around 24,388.

Looking ahead, a slew of key data and events are on the docket. Towards the end of the week, U.S. retail sales for November will be closely monitored as consumption serves as the largest component of U.S. GDP. The U.K. parliament may vote on Brexit on Tuesday and the European Central Bank is scheduled to meet on Thursday and is widely expected to confirm ending its quantitative easing, despite recent lukewarm economic data.

I. U.S. Economic Data/Markets

November unemployment rate holds at 3.70%, for the third consecutive month. Key takeaways included:
- Payrolls increased by 155k versus expectations of 200k, the data in part could be the result of a labor shortage of skilled workers. Also, payroll data still remained relatively strong given the current late stage of the economic cycle.
  - Some analysts noted the data pointed to economic growth moving towards a more normalized pace.
- Wage increase was unchanged y-o-y at 3.1%, the fastest pace since 2009.
- Hiring was concentrated in the health care, manufacturing, transportation, and white-collar sectors. Conversely, government and energy-related fields saw a decline in hiring.
Crude Oil prices jumped more than 5% (with Brent crude trading around $63.11 a barrel) on the back of OPEC and a coalition of oil producers agreeing to cut back on production late last week.
- U.S. crude oil prices touched three- year highs of $77 a barrel two months ago and have since dropped about 30%.
- The U.S. became a net exporter of oil (CRUDE and refined products combined) for the first time in 75 years for the week ending November 30, becoming the world’s top producer of oil and natural gas.
Fed’s Beige Book was largely positive and noted modest economic pick-up from October to November.
- Consumption and manufacturing remained positive, while new home construction and existing home sales either softened or remained unchanged. The agricultural sector was hurt by either tariffs or weather conditions.
ISM Manufacturing rose more-than-expected in November at 59.3% versus expectations of 57.6%. October’s reading was at 57.7%.
- New orders registered the largest increase of 4.7% from the previous month.
ISM Non-Manufacturing index showed a pick-up in November coming in at 60.7, compared to 60.3 in the October reading, beating analysts’ expectations of 59.2.
- Concerns regarding tight labor conditions and the impact of tariffs remained, though respondents to the survey remained positive regarding business conditions and the direction of the economy.
Fed Official Brainard expected gradual rate hikes in the near-term, speaking after the November jobs report. Going forward, policy will be dependent on the economic outlook.
Fed Chairman Jerome Powell reiterated his bullish assessment of the U.S. economy at a conference mid last week.
- Strong job creation/labor markets and gradually rising wages were noted.
Fed Official John Williams noted that the strong U.S. economic backdrop would likely lead to more rate hikes in 2019 at an economic briefing prior to the jobs report on Friday. Continued economic momentum on the back of fiscal cuts partly attributed to his assessment. Other key takeaways included:
- Fed is achieving its dual target of low unemployment and inflation.
- Unlike years past, the Fed is unable to provide strong forward rate guidance, a sentiment that was echoed in the minutes from the November FOMC minutes where officials stressed that the path of rates would be dependent on data and economic developments.

II. Trade

China/U.S. trade war intensified on the back of Meng Wanzhou (CFO of Huawei, a Chinese based technology company, one of the biggest in the world) being detained by Canada (at the request of the U.S.) on charges of violating sanctions against Iran.

III. Other

Eurozone Q3 GDP rose 0.2%, the slowest pace in four years.
- The slowdown in the auto sector partly contributed to the data.
Eurozone private sector growth came in the weakest since 2016, as the region’s composite PMI data fell to 52.7 from a 53.1 reading in October. Uncertainty regarding Brexit, a global trade war and concerns regarding the auto sector and their impact on the economic outlook contributed to the data.
- Germany’s PMI fell to a 47-month low of 52.3.
- Italy’s reflected a second consecutive monthly contraction at 49.3.
Bank of Canada left key rate unchanged at 1.75%. The bank noted future rate hikes would be partly influenced by the levels of oil prices, global trade policies and how higher rates may influence consumption and housing prices. Also, how much room the economy has left to grow without spurring inflation. The next meeting will be held on January 9th.
Reserve Bank of Australia kept its cash rate unchanged at 1.5%, as expected. The next policy meeting is scheduled for February 2019. Concerns expressed by the bank included:
- Tightening credit conditions as bank lending as it relates to the housing sector on the decline.
- Elevated levels of debt on the back of declining asset prices.
- Weakness in global trade.

Key data/events this week: