NFP Recap: "Goldilocks" report for oversold US equities?

Hopes were high heading into today’s US jobs report, and at least on a headline basis, the report did not disappoint.

Traders were looking for another reading slightly above 200k, which would be essentially in line with the 12-month average heading into today’s release (~220k), but as it turns out, the US economy actually created an eye-catching 292k jobs in the month of December. The cherry on top of December’s strong job growth was a +50k revision to the previous two months’ reports, which made the apparent Q4 slowdown in the labor market look far more like noise than a signal of a sputtering economy. While the unemployment rate was unchanged at 5.0%, we saw the labor force participation rate (LFPR) tick up to 62.6%, suggesting that, at the margin, some discouraged workers felt confident enough to start looking for jobs again, a strong long-term sign for the US labor market.

That said, it wasn’t all sunshine and butterflies for bulls on the US economy. Specifically, the average hourly earnings (AHE) measure, which measures the monthly change in wages for US employees, came out flat (0.0%) m/m vs. an expected gain of 0.2% m/m. This reading brought the year-over-year reading to 2.5%, which is firmly above the inflation rate, but not as strong as the 2.7% rate anticipated by traders and economists.

As Wednesday’s Fed minutes reminded us, some central bankers wanted to see actual signs of inflation before raising interest rates more aggressively, and the not-as-strong-as-anticipated increase in wages could keep those policymakers skeptical. Of course, there are still two more jobs reports (as well as plenty of data on inflation, GDP growth, retail sales, etc) before the Fed’s next “major” meeting in mid-March, so there will be plenty more to chew over before the US central bank has to make its next big decision.

Market Reaction

As is often the case with the notoriously fickle non-farm payrolls report, the initial moves we saw across global markets have started to reverse as we go to press. We initially saw a bout of dollar strength, with EUR/USD dropping to 1.0800 and USD/JPY spiking to 118.80, but those moves have since faded as traders digest the implications of mediocre wage growth and the dollar is actually trading below its pre-NFP levels against those two rivals. Likewise, the kneejerk bearish reaction in gold has done a 180° and the yellow metal is now trading back above the key 1100 level.

Of all the major markets, today’s jobs data could serve as a potential “goldilocks” report for deeply oversold US equities.
That’s because the strong quantity of jobs indicates a generally solid economy with more money in consumers’ pockets, but the lack of wage increases has two benefits for big companies: obviously it suggests that salary expenses remain low relative to historical norms, increasing bottom line profits, but it also could keep the Fed in wait-and-see mode, keeping down interest expenses and reducing the attractiveness of bonds, which directly compete with equities for capital.

Of course, we don’t want to read too much into just one month’s jobs data, but as we move through today and into next week, desperate bulls could latch onto today’s NFP report as an excuse for an oversold bounce in beleaguered US stock markets.