Strong November Jobs Report Doesn't Mean Soft Landing Ahead

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Samantha Subin and Tanaya Macheel of CNBC report the S&P 500 notches new high for 2023 Friday, on six-week hot streak after solid economic data:

The S&P 500 rose on Friday to hit a new high for the year after the November jobs report and University of Michigan consumer survey data signaled a resilient economy and cooling inflation, fueling hopes for a so-called soft landing scenario.

The S&P 500 added 0.41% to settle at 4,604.37, while the Nasdaq Composite rose 0.45% to finish at 14,403.97. The Dow Jones Industrial Average gained 130.49 points, or 0.36%, to end at 36,247.87.

The S&P 500 posted its highest close of the year last week, but had yet to exceed its 2023 intraday high set in July until Friday, when it topped 4,609 in afternoon trading. The benchmark is now up about 20% on the year and trading at its highest level back to March 2022.

All the major averages finished the week with gains. The broad market index jumped 0.2% for the period, and the Dow finished marginally higher. Both indexes wrapped six winning weeks, their longest run since 2019. The Nasdaq advanced 0.7%.

The jobs report continues to portray an economy that “isn’t on the brink of recession,” while the combination of falling inflation expectations and a pick up in consumer sentiment support a soft landing outcome, said Michael Arone, chief investment strategist at State Street Global Advisors.

“As long as the soft landing outcome stays intact, the bias for stocks and risk assets remains positive,” he said, noting that inflation coming down, as well as better labor supply-and-demand balance without a major uptick in unemployment are all positives for sentiment.

November’s nonfarm payrolls report showed an unexpected drop in the unemployment rate. The jobless rate fell to 3.7% in November from 3.9% the prior month. It was expected to remain the same. The economy added 199,000 jobs, slightly ahead of the 190,000 estimate from Dow Jones and well ahead of the 150,000 jobs added in October.

The data first raised concerns that the economy was running too hot for inflation to cool enough for the Fed to start retreating from its high-rates policy. Some traders expect the Fed to start cutting rates as early as next spring, with its latest policy meeting set for Wednesday.

On the other hand, the monthly jobs report could also support the notion that the Fed is guiding the U.S. economy toward a soft landing — a steady economic recovery amid falling inflation. Average hourly earnings, seen as a leading indicator of inflation, rose about as expected in November as the economy added more jobs than the prior month.

Meanwhile, a closely watched University of Michigan survey showed inflation expectations drop and consumer sentiment jump in December to it highest level since July.

These data points all help support the thesis that the Fed is likely done with its rate hiking cycle, said Mona Mahajan, Edward Jones senior investment strategist.

Shares of Boeing, FedEx, and Costco hit new highs for the year on Friday as investors bet the economy would skirt a recession.

It's Friday, markets had another good week as the latest jobs report suggests there is no imminent recession yet.

It also suggests the Fed will not pivot any time soon and cut rates.

Nonetheless, digging deeper, the November jobs report wasn't as strong as it appears:

Friday’s data release also showed that there continues to be pressure on labor costs. The pace of wage growth—a metric Federal Reserve officials watch closely because wage growth feeds directly into services inflation—proved fairly resilient in November. Average hourly earnings for all employees rose 0.4% in November, slightly faster than the 0.3% month-over-month gain expected and reversing the cooling seen in October. 

In the last 12 months, wages have increased by 4%, in line with expectations from economists surveyed by FactSet. And once downward revisions to the prior months’ data are factored in, wage growth remained steady at 4% recorded in October. But that is the slowest pace since June 2021. 

Wages remain above where the Fed would like to see, but the end of the strikes likely contributed to stronger growth in November relative to October, and therefore wage pressures should cool further in the months ahead.

The number of hours worked in November hit 34.4 hours a week last month, edging up slightly by 0.1 hour from October, according to the bureau. While economists expected the level to remain the same or even slow, the slight uptick still represents a decline from the high of 35 hours hit in January 2021. This data point is typically seen as an indicator of business growth.

Seasonal shifts in employment and increased strike activity have injected a “considerable degree of noise” into the jobs data, making it more difficult to decode employment trends, writes EY Senior Economist Lydia Boussour.

There is still evidence the labor market’s momentum is cooling, albeit slowly and unevenly. The bureau, for example, again revised down September’s blockbuster jobs growth by 35,000 to 262,000 for the month.

“Sorting through the noise, the picture that is emerging is one of a resilient but cooler labor market. Job gains have become less broad-based, labor demand continues to fall, and jobless claims are creeping higher in a sign of softer conditions,” Boussour writes.

The 10-year US Treasury bond yield rose by 12 basis points to close at 4.245% but stocks still rallied hard as fears of a hard landing subsided:

As shown above, long bonds had an incredible rally after the 10-year yield hit 5% in mid-October but some bears think the Fed is going to hammer markets next week and send yields higher:

I'm not sure what the Fed will do, doubt it wants a repeat of Christmas 2018 so Powell will need to walk a fine line.

What I am sure of is despite this morning's jobs report, the US and global economy are headed for a very hard landing:

And if there's a recession and the Fed starts cutting rates, watch out below, stocks will get clobbered:

And once again, weakness in the US housing market will lead to a recession as the affordability crisis grows:

Kind of makes you wonder whether homebuilder stocks are getting way ahead of themselves:

Yes, lack of existing home supply favors new homes but a recession will crush housing, period.

 Still, so far equities are on a tear and volatility keeps dropping, for now:

What happens over the next three months will be telling but my hunch is oil prices will continue to sink as signs of a global recession strengthen.

That obviously will not be good for stocks but for now, people are happy with any gains they can get to close out the year.

Below, CNBC's Rick Santelli joins 'Squawk Box' to break down the November jobs report.

And Degas Wright, Founder, CEO, and CIO of Decatur Capital, discusses the markets and what's ahead for stocks this month.

third, Jan Hatzius, Goldman Sachs chief economist and head of global investment research, joins 'Squawk on the Street' to discuss the latest economic data, the likelihood of a recession, and more.

Fourth, Rashmi Garg, senior portfolio manager at Al Dhabi Capital, joins from the sidelines of the Sohn Conference in London to discuss the market outlook for 2024, the possibility of a recession, and where she foresees strong positions in the stock market.

Lastly, Lawrence H. Summers, Former US Treasury Secretary explains why he believes it's premature to proclaim the war on inflation over amid a positive jobs report for November. Summers also discusses the growing antisemitism crisis on some college campuses after congressional testimony of presidents at Harvard, UPenn and MIT.

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