What The Fed Will Do After The December Jobs Report

After a nearly 25% increase in the S&P 500 (SP500) last year, the stock market’s attention to the first monthly jobs report released in 2024 will intensify. Through its excessive bullishness, investors potentially over-priced the probability of more than one 25 basis point rate hike.

On the first day of trading for the year, markets aggressively corrected for the risk of too strong a jobs report coming this Friday at 8:30 a.m. The Federal Reserve weighs heavily on monthly inflation and unemployment data in its monetary policy meetings.

What will the job report look like?

Ahead of the non-farm payrolls report (“NFP”), the Labor Department reported 8.79 million job openings. Despite a sharply lower figure than the high of 12.0 million in March 2022, stock markets are not cheering. The job openings rate of 5.3% did not change. In November, the establishment size class, or job openings, hires, and total separations rates, hardly changed. I highlighted the monthly change below:

This data offers a mixed view on the health of the job market. It increases the importance of the NFP report later this week.

Review of Previous Two Jobs Reports

On Nov. 3, 2023, the Bureau of Labour Statistics posted a weaker October jobs report. Jobs declined from striking workers in the automotive sector. In hindsight, it masked a troubling trend in declining demand for high-priced electric vehicles. Ahead of that weak report, market sentiment reversed abruptly by turning positive.

In the November 2023 non-farm payrolls report posted on Dec. 8, 2023, Nasdaq (QQQ) and S&P 500 added around 5% in gains ahead of the report. In the stock market-friendly report at the time, job openings fell. Job openings fell in healthcare, finance and insurance, real estate, and social assistance. Jobs grew in the service industry, such as in restaurants and hotels. Still, the ADP posted private sector employment increasing below expectations.

Besides stock markets rising in response, U.S. Treasury bond yields fell. Last month, investors could collect over 5% in yield for four out of the seven maturities. The yield on Dec. 8:

At the time of writing, the 5% yields are no longer available for the 12-month Treasury:

The stock market needs a weak jobs report later this week as a catalyst to send Treasury yields lower.

Strong November 2023 Jobs Report

In November, the economy added 199,000 jobs, sending the unemployment rate down to 3.7%. Investors dismissed the strong NFP report by discounting the workers previously on strike returning. This contributed to a 28,000 increase in manufacturing jobs. In the upcoming report, a slowdown in the automotive industry might lead to flat or declining jobs for December.

Healthcare jobs increased by 77,000 in November. As the flu season accelerated, expect this sector to hire more workers, increasing the job count in the December NFP report. As always, readers should not look for a correlation between rising healthcare jobs to healthcare real estate investment trusts. Seeking Alpha analysts recently downgraded Medical Properties (MPW). MPW stock formed a holding pattern at between $4.60 and $5.50 since September 2023.

Seeking Alpha has a “Hold” quant rating on the REIT, despite the strong valuation and revision factor grades:

The healthcare jobs report may have little to do with the stock rebound in the drug manufacturing sector. Merck (MRK) likely gained 10% in only a month lifted by the stock market rally. Beaten up on high selling volume, Pfizer (PFE) shares capitulated on Dec. 14 at $26.13. It rebound back to nearly $30 is likely a result of a sector rotation out of the magnificent seven into S&P 500 stocks. Value investors are buying the worst-performing drug companies, as discussed here.

In the score comparison below, Pfizer has strong valuation and profitability grades. Merck scores well on growth, profitability, and momentum. However, MRK stock trades with a weak valuation grade. This suggests the stock could pull back from here.

Government Job Change in December

The 49,000 increase in government jobs skewed the November NFP report. Local and state governments added jobs. In the December NFP report, expect the government to slow its hiring rate ahead of the holidays. Still, the long-term hiring uptrend is a likely scenario to support the aerospace and defense industries.

Last month, I highlighted RTX (RTX) bottoming at below $70. In the last month, buyers emerged at $80 as the stock traded recently at $86.51. The NATO agency is assisting a group of European countries, through Guidance Enhanced Missiles, in a contract worth as much as $5.5 billion.

L3Harris Technologies (LHX) also performed well in the last month. Readers also should watch Rolls-Royce Holdings (OTCPK:RYCEY). SA Quant Strategist Steven Cress lists it as one of the top 10 stocks for 2024. December job growth in the defense and aerospace industry would only support this bullish rating.

Higher Retail Jobs

Retail trade employment fell by 38,000 in the November report. For the upcoming report, retailers likely hired temporary workers. Companies like Macy’s (M) and Gap (GPS) would need more staff to handle the seasonally strong shopping activity.

Expected Fed Decision

The markets widely expect the Federal Reserve to cut interest rates this year. However, the jobs report this Friday is unlikely to offer any dramatic changes. The central bank already planned a minimum 25 basis point cut. Stock markets want at least three 25 bps cuts (75 bps) or more. After stocks surged in so short a time, bulls anticipate rate cuts sooner.

Investors should prepare for obstacles in a soft landing scenario. Fortunately, inflation rates, especially the personal consumption expenditure, trended lower. The combination of weak job growth and falling inflation will give markets what they want.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.