Vital Statistics:
Stocks are lower after a stronger-than-expected jobs report. Bonds and MBS are getting crushed.
The economy added 256,000 jobs in December, which was well above the 156k Street expectation. The unemployment rate ticked down from 4.2% to 4.1%. Jobs were added in healthcare, social assistance and retail.
The labor force participation rate was unchanged at 62.5%, and the employment-population ratio rose to 60%. Average hourly earnings rose 0.3% on a monthly basis and 3.9% on a year-over-year basis.
Needless to say, this stronger-than-expected jobs report caused an immediate sell off in the bond market. The psychology of the bond market has been terrible for the past several months, so this isn’t a surprise. We did see stocks get rocked as well, as we have entered the “good news is bad news” phase of the market, where stocks would welcome lower rates, and that isn’t in the cards at the moment.
The Fed Funds futures moved more hawkish on the report, with the markets betting that we see only one rate cut this year (40%), and the second most likely scenario is zero (28%).
If you look at the internals of the jobs report, you see a familiar story – most of the job creation has been due to statistical adjustments. If you add up the headline numbers over the past year, you get a total of 2.2 million jobs created during the year. However, if you look at the actual number of paychecks being collected (i.e the “Employed” line of the jobs report), that number is actually just over 500k. So about 23% of the “jobs created” over the past year were real, and the rest weren’t. That explains why the job market looks strong according to the numbers, but doesn’t feel strong, especially if you ask a job-seeker.
Boston Fed President Susan Collins said she is less worried about the labor market. “My concerns about emerging labor-market fragility have decreased more recently, as the unemployment rate stabilized after rising notably in the first half of 2024,” Collins said in a speech to a commercial real estate trade group in Boston. “There is likely some room for additional wage gains that would help to raise the purchasing power and economic wellbeing of workers without fueling inflation,” she said.
Certainly the jobs report today supports this contention. This gives the Fed some leeway to wait until we have more clarity about what Trump intends to do on the issue of tariffs and fiscal policy. The economy has been supported by heavy fiscal stimulus, which will be pared back as well.
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