Published as of: December 8, 2023, 4:40 p.m. ET
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(Friday market close) The S&P 500 Index (SPX) surged Friday to close at nearly 23-month highs despite stronger-than-expected monthly jobs data raising new concerns about the interest rate outlook. An early pop in Treasury yields following the jobs number hindered Wall Street’s progress initially, but stocks rallied in spite of rising yields, helped by ideas that strong consumer spending could engineer a soft landing for the economy.
The November Nonfarm Payrolls report showed 199,000 jobs created and unemployment falling to 3.7%, from October’s 3.9%. Analysts had expected jobs growth of around 180,000, up from 150,000 in October.
The benchmark 10-year Treasury note yield jumped double-digits immediately after the report, dragging down major indexes. Wall Street quickly turned around however, sending the SPX to its first close above 4,600 since January 14, 2022. That was before the Federal Reserve began its rate hike cycle that took interest rates from zero to current levels of 5.25% to 5.5%, a two-decade high, as the central bank fought inflation. The SPX is now up nearly 20% year-to-date.
Energy company shares led the way today as the strong jobs report and bullish consumer sentiment data released later Friday helped crude oil rally from recent lows. Info tech, financials, and consumer discretionary were also firm.
Treasury yields remain well below October's 16-year highs of near5%. The 2-year Treasury note yield was especially firm but remains down about 10% from its recent peaks. The 10-year yield ended the day at 4.23%, about 12 points above recent lows.
Following the payrolls report, rate cut expectations retreated but didn't exactly go into winter hibernation. Friday’s futures market began pricing in about a 55% probability of an initial Federal Reserve rate cut by March. That fell to 48% moments after the data and ended the day near 45%
On the other hand, little changed in terms of expectations for next week's Federal Open Market Committee (FOMC) meeting, which brings a rate decision and new economic and rate projections on Wednesday. The market long ago built in nearly 100% chances of no FOMC action at this meeting, and that remained the case after the report.
"This report is nowhere near strong enough to nudge the Fed into a rate hike next week," added Collin Martin, a director of fixed income strategy at the Schwab Center for Financial Research.
Before the FOMC wraps up next week, investors get their hands on two crucial inflation measures. November Consumer Price Index (CPI) data are due early Tuesday followed by the November Producer Price Index (PPI) early Wednesday. Later in the week, the European Central Bank (ECB) and the Bank of England (BoE) hold their meetings.
The barrage of central bank and inflation developments could make next week a volatile one for investors, and an end-of-the-year rally is far from assured. Technically speaking, it was constructive to see both the SPX and the Nasdaq Composite® (COMP) close above technical resistance at 4,600 and 14,350, respectively. Those levels had been in place for some time, and it will be interesting to see if today's strong technical close can carry over into next week.
- Here's where the major benchmarks ended:
The S&P 500® Index (SPX) was up 0.41% at 4,604.46, up marginally for the week; the Dow Jones Industrial Average (DJI) was up 130 points (0.36%) at 36,247.87, up marginally for the week; the Nasdaq Composite® (COMP) was up 63.98 points (0.45%) at 14,403.97, up 0.7% for the week.
- The 10-year Treasury note yield (TNX) was up 10 basis points at 4.235%.
- The Cboe Volatility Index (VIX) was down 5.44% at 12.35.
Read all our market commentary on our Insights & Education page, and you can follow us at @SchwabResearch.
Stocks on the move
The following companies had stock price moves driven by quarterly earnings, analyst ratings, or other news:
- Apple (AAPL) rose 1% to just below an all-time high and saw its market capitalization again claw back above $3 trillion this week. Strength continued after the Wall Street Journal reported that Apple and its suppliers are working to build over 50 million iPhones in India annually within two to three years. If this were achieved, India would account for a quarter of global iPhone production, while China would remain the largest producer.
- Honeywell (HON) fell 1.6% after it made a $4.95 billion all-cash transaction for Carrier Global's (CARR) Global Access Solutions business, a move the company hopes will help its Building Technologies segment.
- Lululemon (LULU) reversed earlier losses to rally over 5% after reporting better-than-expected earnings late Thursday. The company's guidance came in below the average Wall Street estimate, but several analysts following Lululemon said the company had a strong quarter and may be staying conservative with its estimates. Oppenheimer raised its price target.
- MGM Resorts (MGM), Las Vegas Sands (LVS), and Caesars Entertainment (CZR) all posted solid gains after the U.S. November jobs report showed higher-than-expected job gains and a 0.4% month-over-month rise in hourly wages. A solid preliminary University of Michigan Consumer Sentiment report later Friday may also have bolstered ideas that consumers may have extra cash to spend on casinos and other entertainment.
- Paramount (PARA) catapulted 12% after Deadline reported that Skydance Media CEO David Ellison and Redbird Capital are considering the acquisition of National Amusement's voting shares of the media conglomerate. That could lead to the group unloading certain assets.
- RH (RH) plunged nearly 14% after the upscale home furnishings company formerly known as Restoration Hardware disappointed investors with its Q3 earnings report. The results included a 14% year-over-year sales drop, owing in part to high mortgage rates that are keeping people from moving.
- Next week's earnings slate features two other tech bellwethers, enterprise IT leader Oracle (ORCL), which is expected to report results Monday, and digital publishing software maker Adobe (ADBE), scheduled for Wednesday. Oracle and Adobe shares have climbed 40% and 81% this year, respectively.
Bullish investors wanted Federal Reserve rate cuts to start early next year. On Friday, the U.S. jobs market replied, "Not so fast."
Stronger-than-expected November jobs growth of 199,000 and a surprise drop in the unemployment rate to 3.7% initially rattled Wall Street as Treasury yields rose by double digits. Stocks then quickly turned green as investors appeared to emphasize the brighter side of the report. While the vigorous employment growth could push back on ideas of early rate cuts, it also diminished fears of a consumer spending slowdown possibly leading to recession.
Wages growth of 0.4% month-over-month eclipsed analysts' expectations for 0.2%, but the 4% year-over-year average hourly wage increase was down from 4.1% in October and kept the overall trend heading downward, a positive sign on the inflation front. The unexpectedly large monthly wages jump might have partially reflected auto workers heading back to their jobs after the autumn strike and beginning to enjoy the higher pay they negotiated.
Peeling back the onion a bit more, there's reason to think the report might not have been as rate-unfriendly as first feared. For one thing, the government downwardly revised September jobs growth by 35,000. And November's jobs growth likely reflected the one-time factor of auto factory laborers returning to work. In addition, employment in some lower-paying sectors like Leisure and Hospitality and Social Assistance ticked up. November's employment growth was also well below the 12-month average of 240,000.
In addition, Friday's data followed a reading earlier this week showing unit labor costs falling 1.2% in Q3, evidence that the job growth taking place isn't straining employers in a way that might force them to consider hiking prices for their customers.
"Traders may now turn their eyes to next week's CPI/PPI/FOMC since there isn't enough in this report to counter the soft landing thesis," said Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research.
As Schwab's Peterson notes, next week features a triple play of two major inflation reports and the FOMC meeting. Their outcomes could help determine whether there's a "Santa Claus" rally in store or if investors get lumps of coal in their stockings.
Even before the data hit, the market faces possible volatility Monday amid several scheduled Treasury auctions. Recent ones have seen decent demand for U.S. debt, easing yields. Any change in that has a chance to push Treasuries down, possibly hurting stocks.
For CPI on Tuesday, analysts expect a headline rise of 0.1% month over month in November, up from October's flat result, according to Trading Economics. Year-over-year CPI is seen rising 3.1%, down from October's 3.2%. Lower gas prices likely helped ease the annual CPI growth rate.
For core CPI, which weeds out volatile energy and food prices, analysts expect a 0.3% rise, up from October's 0.2%. Annual core inflation is seen steady with October's growth at 4%.
The inflation reports follow a surprising retreat in expectations for inflation seen in Friday's preliminary December University of Michigan Consumer Sentiment report. Expectations for one-year inflation fell to 3.1% in early December from November's 4.5%, while five-year inflation expectations of 2.8% was the lowest reading since July 2021. Consumer sentiment also improved to 69.4 from November's 61.3. Falling gas prices during the survey period might have played into stronger sentiment and easing inflation worries. Keep in mind that these are preliminary data, so the final December report in two weeks might make revisions.
By the time Fed Chairman Jerome Powell takes the podium Wednesday afternoon for his post-FOMC meeting press conference, investors and the Fed will have far more information in hand about the pace of price increases. Powell has adopted a somewhat hawkish demeanor in recent speeches, emphasizing that the FOMC hasn't discussed rate cuts.
It's almost like a repeat of conditions a year ago when the Treasury market ramped up expectations for 2023 rate cuts even as Powell said the FOMC isn't "thinking about thinking about cuts." Powell won that particular battle as the Fed continued raising rates through mid-2023 to current two-decade highs between 5.25% and 5.5%. That's where rates have been since July, and today's jobs report indicated that they're likely to stay there longer than some bullish investors had hoped.
The Fed will likely want to see CPI and PPI show continued signs of tracking lower, but even if they don't it's just one month of data. Policy makers look well beyond any specific month for broader trends, and the Fed also tends to view the Personal Consumption Expenditures (PCE) price meter as its favored inflation reading over CPI.
Another thing to remember about the jobs report is that other labor-related data lately have shown far less vigor. The October Job Openings and Labor Turnover Survey (JOLTS), earlier this week, came in well below analysts' expectations. And the four-week average of continuing jobless claims hit a two-year high yesterday.
Friday's jobs report "isn't enough to counter any of the cooling in the labor market that the data has conveyed over the past couple of months," said Schwab's Peterson.
As the market approached Friday’s close, futures trading pointed to a 98.4% probability of the Fed keeping rates unchanged at next week’s meeting, according to the CME FedWatch tool. The probability of rates staying paused after the January FOMC meeting was 94.4%, while chances for a 25-point rate cut by the March meeting checked in near 45%, down from 55% before the jobs report. By next May, the probability of a cut reaches nearly 80%, according to futures trading.