January 5 – Today’s focus is on the health of the U.S. jobs market, and how that might influence future monetary policy, following the release of the government’s monthly employment report. Stocks initially turned lower following the release of this morning’s data, while the dollar followed Treasury yields higher. Meanwhile, the VIX is trading near 14, which is just below a fresh seven-week high set overnight. The dollar index is trading near 102.6, after setting a three-week high near 103.0 earlier. Yields on 10-year Treasuries are trading near 4.05%, which is just below this morning’s three-week high, while yields on 2-year Treasuries are trading near 4.43%. Crude oil prices are roughly 2% higher in early trade, while the grain and oilseed markets traded mixed to lower again overnight, with additional weakness coming after disappointing export sales data was released this morning, combined with a stronger dollar following the jobs data that came out at the same time.
The economy created 216K jobs in December, which came in well above analyst expectations of 164K jobs. The November data was revised to 173K jobs created, down from the 199K originally reported. The unemployment rate remained unchanged at 3.7%, versus analyst expectations that it would tick higher to 3.8%. The jobs participation rate fell to 62.5%, down from 62.8% in November. Private payrolls added 164K jobs in December, up from analyst expectations of 127K jobs, while the November data was revised to 136K jobs created, down from the 150K originally reported. The number of long-term unemployed (jobless for 27 weeks or longer) stands at 1.2 million people, which is little changed over the past year. The survey revealed that 5.7 million people responded that they want a job and are unable to find one, but also admitted that they had not looked for a job over the past four weeks, and therefore were not counted as being in the labor force.
Employment continued to trend higher in government, health care, social assistance, and construction, while transportation and warehousing lost jobs in December. Government added 52K jobs in December, while healthcare added 38K jobs, with social assistance adding 21K and construction adding 17K jobs. Manufacturing added 6K jobs in December, down from 26K created in November, but above analyst expectations of 5K. The average workweek slipped to 34.3 hours, down from 34.4 hours previously. Average hourly earnings rose 0.4% month-on-month in December, matching the previous month’s pace and above analyst expectations that they would slip to 0.3% growth. Average hourly earnings were up 4.1% year-on-year in December, up from 4.0% in November and beating analyst expectations that they would fall to 3.9% growth.
Shelter and wage growth have been a couple of areas where inflation stickiness has been a problem for the Federal Reserve, as it has previously stated on more than one occasion. We’ve recently seen data from the housing sector suggesting that inflation will remain a problem in the housing sector, as lower mortgage rates invite a resurgence of interest in the housing market, while rents continue to rise as well. Today’s data adds hawkish fodder for the wage sector as well, with wages still not coming down enough to relieve worries that they will keep overall inflation at the 2% mandated target. There are certainly signs that monetary policy over the past 21 months is slowing growth, but these two areas remain a concern, fitting with concerns expressed in the minutes of the December meeting of the Federal Reserve that rates may need to stay high – or even tick a bit higher in the future – in order to deal with these lingering areas of inflationary pressures. That, combined with high levels of debt certificate issuance tied to fiscal spending, accounts for the rise in Treasury yields, the corresponding rise in the dollar, and the headwinds for the broader commodity sector.
The near-term exception is crude oil, which is adding geopolitical risk premium currently. But the grain and oilseed sector currently lacks such a story to counter these bearish macro factors. We’ve seen a bit of strength in wheat prices amid chatter in the cash market that China may be shopping again, combined with increased tensions in the Black Sea region, but that has thus far not triggered much more than speculative short-covering. Rains continue to fall in previously dry areas of Brazil that have largely erased near-term stress concerns, resulting in removal of weather premium from the oilseed market. We’re seeing some activity in the commodities as index funds engage in the annual rebalancing of their portfolios, but the bigger focus now is on next week’s big set of USDA crop reports, which is the largest data dump of the year. It will include quarterly grain stocks, small grain seedings report and updated 2023 production estimates, along with the normal domestic and global balance sheet adjustments.
