The stock futures market has seen a mixed week so far, with the major indexes mostly trading sideways ahead of the critical November jobs report due on Friday.
Futures point to a flat open on Wall Street, as investors refrain from taking big bets before analyzing the jobs data. Economists forecast nonfarm payrolls to increase by 190,000 in November, up from October’s 150,000. However, the headline figure will likely take a backseat to metrics like wage growth and unemployment rate to gauge the health of the labor market and the economy.
A Moderately Growing Jobs Market is Ideal for the Fed
According to market analysts, the ideal jobs report in the eyes of the Federal Reserve would show employment continuing to grow at a steady pace without wage inflation picking up. This would reassure policymakers that their aggressive interest rate hikes this year are having the intended effect of cooling the economy and taming inflation.
The central bank has raised rates by 375 basis points this year to the current range of 3.75% to 4%, the highest since 2008. The blistering pace of hikes has sparked worries of an impending recession, dragging markets lower. However, recent economic data has allayed some fears of an immediate downturn. This “Goldilocks” environment has powered stocks higher over the past month.
The Dow Jones and the S&P 500 are on five-week winning streaks, while the tech-heavy Nasdaq Composite index has rallied for four consecutive weeks. Another decent jobs report could extend the momentum.
Labor Market Resilience is Key for Further Market Gains
Most experts concur that the resilience of the labor market holds the key for stocks to sustain gains amid an uncertain macro backdrop. Even though job openings have fallen from record highs this year, there are still nearly 1.7 open positions for every unemployed person. Businesses continue to hire more workers to meet robust consumer demand.
The October jobs report showed employers adding 261,000 jobs, while unemployment rose to 3.7%. Average hourly earnings rose 0.4% month-over-month and are up 4.7% year-over-year. These numbers will be closely watched to determine whether wage pressures are easing.
Moderately strong job growth accompanied by slowing wage inflation would reinforce hopes that a soft landing for the economy is possible. This could spur a Santa rally to close out 2022.
On the flip side, an extremely hot jobs report would stoke fears of more aggressive Fed policy and lead to a pullback in risk asset prices.
Tech Sector Provides Big Boost on Signs of Slowing Wage Inflation
Stocks rallied on Thursday, led by outsized gains in technology and internet giants. The Nasdaq jumped over 1.3% while the S&P 500 rose nearly 1%. The catalyst was fresh data from Payroll processor ADP showing U.S. companies added 127,000 jobs in November, below estimates of 200,000.
The report reinforced easing wage pressures, sending bond yields lower. Falling yields boosted expensive growth stocks, especially in sectors like technology and communication services. Google-parent Alphabet surged over 5% to lead the Nasdaq higher after unveiling its AI chatbot Bard to compete with Microsoft and OpenAI.
Advanced Micro Devices jumped nearly 10% after announcing a new AI chip that will be used by giants like Meta and Microsoft. Nvidia, Netflix, Meta Platforms and Apple also posted robust gains.
The Dow Jones lagged its peers, rising only 0.2% due to mild losses in shares of Disney, Boeing and Chevron. Seven of the 11 major S&P 500 sector indexes were higher, with technology and communication services adding over 2% each. Healthcare and utilities also outperformed.
Final Jobs Data Will Set the Tone for December
While the ADP numbers cheered markets, the official November payrolls data will provide more clarity on the health of the jobs market. Economists expect the unemployment rate to hold steady at 3.7% as job growth cools to 190,000.
Average hourly earnings are forecast to rise 0.3% month-over-month and 4.6% from a year ago. These wage metrics will guide expectations around how much further the Fed will need to hike rates to tame inflation.
Most traders expect a 50 basis point increase at the December policy meeting, followed by a data-dependent approach in 2023. If wage growth shows signs of decelerating in November, it could reinforce hopes of a less aggressive Fed next year. This would provide a boost to stocks, especially beaten-down technology and growth shares.
On the other hand, sticky wage inflation near multi-decade highs could force the Fed to keep rates higher for longer. This could halt the nascent market rebound and lead to another pullback by year-end. Much depends on the jobs data, which will set the tone for December and early 2023.
Conclusion: Moderating Wage Growth is Key for Sustained Market Recovery
To conclude, the November jobs report will be a high-stakes event for markets that could determine the near-term trend on Wall Street. While hiring is expected to moderate from stronger levels earlier this year, the pace of wage growth holds the key.
Signs of slowing hourly earnings would reinforce hopes that the Fed’s policies are working to restore price stability without severely damaging the labor market. This Goldilocks outcome would boost the prospects of a sustained market recovery as the focus shifts to an easing rate hike cycle in 2023.
However, sticky wage inflation near multi-decade highs would dash hopes for a less aggressive Fed. It may spark concerns over more rate hikes that could potentially drive the economy into a recession next year. This gloomier macro scenario would halt the nascent rally over the past month and result in another market pullback.
Much depends on the monthly jobs data, which will determine whether bulls or bears have the upper hand headed into December and early 2023. Traders are hoping for indicators supporting the case for a soft landing. Anything else could scuttle the recent momentum, especially for interest-rate sensitive technology and growth stocks.
