US Monthly Jobs Report Explained 12/2/16; Focus on Wages and Unemployment Rate

Here is the Reader's Digest of the Jobs Report. As always, reference Keystone the Scribe for the daily market chronology and more details.

At 8 AM EST, Friday, 12/2/16, traders are focused on the imminent jobs report the last jobs data before the expected FOMC rate hike on Wednesday, 12/14/16. The wage data is critical. Wages must continue to increase for a rate hike path forward to be viable. Inflation cannot exist without wage inflation.

Fed Funds futures indicate a 96% chance of a rate hike on 12/14/16. More importantly, the Federal Reserve’s comments on future hikes will impact global markets. The current thinking is that the Fed will hike twice in 2017 and three times in 2018. The FOMC has lost credibility since Fed Chair Yellen and company had communicated the intent to hike four times this year and there has not been one single rate hike as yet. The 12/14/16 meeting is the last chance for the Fed to hike rates in 2016. The first rate hike off the zero bound (ZIRP; zero interest-rate policy; 0.00% -0.25%) occurred last December with the key rate currently at 0.25%-0.50%.

The consensus of traders and analysts expect 170K jobs compared to last month’s 161K jobs. The unemployment rate is expected to remain unchanged at 4.9%. Private payrolls are expected at 155K compared to the prior month’s 142K. The Labor Participation Rate should remain at decade lows at 62.8%. The Average Workweek is expected to remain unchanged at 34.4 hours.

The critically-important Average Hourly Earnings are expected at +0.2% month-on-month versus last month’s robust +0.4% gain. The wage data is more important than the headline numbers since it dictates whether the Fed’s desired inflation will appear, or not, going forward.

Wages are increasing at +2.8% per year. The three-month uptrend in annualized wages are as follows; August at 2.5% annual wage increase, September is +2.7% and October +2.8%. Wages are rising so Yellen touts the rate hike line. Any move backwards from the +2.8% gain per year in wages will disappoint the Fed.

As a rule of thumb, wage increases of from +4.0% to +4.5% per year create sustainable and longer term inflation. Thus, wages are increasing but Fed Chair Yellen and other FOMC members know they cannot sleep until wages continue moving higher and the annual wage gains start running far above to +3% and above +4%.

If the wage number comes in less than the +0.2% month-on-month expected, or less than the annualized +2.8%, it will throw a wrench into the works for the proposed 12/14/16 rate hike that everyone expects. A portion of this year’s wage gains are due to the minimum wage increases at MCD, WMT and many other companies and businesses. These adjustments may have run their course. The Federal Reserve will be extremely disappointed if the wage data now trails off as the year ends and 2017 begins especially when they appear ready to raise rates.

S&P -3. Dow -16. Nasdaq -14. VIX 14.32. WTIC 50.58. Brent 53.30. Gold 1172. Silver 16.46. Copper 2.6065.

Treasury  yields are; 2-year 1.13%, 5-year 1.88%, 10-year 2.42%, 30-year 3.07%. German bund 0.329%. Japan 10-year yield 0.035%. UK gilt 1.44%. France 10-year yield 0.79%.

One minute before the data, the S&P futures are -2. Dow -8. Nasdaq -8. Euro 1.0643. Dollar/yen 114.00. Pound 1.2621.  Gold 1173. Silver 16.47. Copper 2.6095.

Treasury  yields are; 2-year 1.14%, 5-year 1.88%, 10-year 2.43%, 30-year 3.08%.

At 8:30 AM EST (1:30 PM London and GMT; 2:30 PM Frankfurt and Paris; 10:30 PM Tokyo), the Monthly Jobs report is 178K jobs with an unemployment rate at a low 4.6%. The rate will be the headline news number with 4.6% the lowest since August 2007. The jobs number is right in line with the 170K expected with the rate far lower than the 4.9% estimate. The unemployment rate for adult men is at 4.3%. The prior two months of job gains are revised lower by a net 2K jobs. September is revised higher from 191K to 208K and October is revised lower from 161K to 142K.

Wages fall out of bed. Average Hourly Earnings drop -0.1%. Employees lose about three cents per hour. The annualized wage number drops from 2.8% to 2.5%. Wages are going the wrong way. The clock just fell off the wall in Janet Yellen’s office at the Eccles Building. Inflation cannot exist without wage inflation.

If the Fed goes ahead with the hike in a few days, and inflation is a mirage, and wages and job opportunities sink, Yellen may have to lose face in early 2017 reversing the hiking path and considering ZIRP again. That would destroy Fed credibility. Yellen has a lot to think about over the next 11 days; it will be the most important decision she makes as the Fed Chair. The projected two-hike path for 2017 may be reconsidered by the Fed due to the shaky wage data.

Private payrolls are at 156K exactly in line with the 155K expected. The gains in jobs came with professional and business services up 63K, healthcare up 28K jobs and construction gaining 19K jobs. Retail jobs decrease by 8K and 4K jobs are lost in manufacturing. Interestingly, retail jobs are lost at bricks and mortar stores but increase for those providing support to online retail sales.

The Labor Participation Rate is lower to 62.7%. The number of people working in America remains the lowest since the 1970’s. The U-6 rate is at 9.3% the lowest since April 2008. The Average Workweek remains unchanged at 34.4 hours.

The low unemployment rate of 4.6% is immediately plastered across internet news sites. This number is very revealing but not in the happy context everyone is now touting. First of all, any number at 5% or lower is in essence full employment. There are always folks that are unemployed due to factories temporarily closing, seasonal layoffs, workers taking time off to help with a sick relative, a host of reasons, so there is always a base unemployment rate at 3% to 5%.

Therefore, the 4.6% rate is simply a more full unemployment number. Typically, the low rate portends a vibrant growing economy running on all cylinders but that is not happening. In fact, more high-paying manufacturing jobs were flushed down the toilet last month. There are no animal spirits in the economy and markets. People are not running out to look for jobs. An interesting phenomena occurs with the rate after recessions and prolonged slow economic periods.

When the economy is truly improving and ramping higher to receive its glory, the unemployment rate actually pops higher for a short period of time. The reason is the way the data is compiled. The rate is based on whether the person is actively looking for a job. When economic conditions improve and ‘Help Wanted’ signs are in every window, unemployed workers run back to the workforce finally confident that better times are ahead; they have animal spirits of hope and confidence in the economy and future.

The unemployment rate climbs higher since these folks are now counted as seeking employment but in the near-term they are also counted as unemployed. So a more encouraging number for the unemployment rate would have been a rise to 5.2% or higher (rather than drop to 4.6%). An increasing rate would prove that people really believe the economy is in great shape since they are running out confident that they can finally find a job. With a lower and lower full employment number occurring, now down to 4.6% the lowest in decades, it is more of the same- same-o with the economy.

Unemployed folks continue to see a slow stagnant lackluster economy; there is no reason to pound the pavement since there are no jobs. Nothing has changed. The unemployed are sitting at home waiting for the economy to improve. They are watching television, losing skills, and wondering why the government and Federal Reserve rewards the wealthy each day at the expense of common people. The rich become richer and the poor poorer.

American society will pay for the growing income inequality gap; it already is. The wealthy may find that having money is not much fun in a society that is bifurcated into the very rich versus the very poor without a middle class remaining. Human greed is destructive to any economic system. The Federal Reserve has created this rich versus poor society with their eight  years of obscene Keynesian money printing and spending that only rewards the wealthy.

S&P -3. Dow -16. Nasdaq -8. DAX -0.7%. CAC -1.2%. FTSE -0.7%. USD 100.79. US 2-year yield is 1.11%. The 10-year yield drops to 2.40%. Yields may be dropping (bonds rallying) due to the weak wage data.

At 8:34 AM, markets are calm after the data. S&P -1. Dow -10. Nasdaq -5. Russell -1. VIX 14.15. DAX -0.7%. CAC -1.1%. FTSE -0.7%. MIB -1%. USD 100.81. WTIC oil is down -0.4% to 50.86. Brent oil is down -0.7% to 53.55. Natural gas is down -1.1% to 3.47. Gold 1172. Silver 16.52. Copper 2.609.

Treasury  yields are; 2-year 1.11%, 5-year 1.85%, 10-year 2.40%, 30-year 3.06%. The 2-10 spread is 129 bips.

At 8:36 AM, S&P -4. Dow -21. Nasdaq -11. Russell -3. VIX 14.17.

Euro 1.0653. Dollar/yen 113.75. Pound 1.2645. USD 100.86. Mexican peso 20.7340. Canadian dollar 1.3273. Dollar/yuan 6.8877. Aussie dollar 0.7431.

At 8:48 AM, 18 minutes after the data, S&P -4. Dow -25. Nasdaq -12. Russell -2. VIX 14.27. DAX -0.8%. CAC -1.2%. FTSE -0.8%. Euro 1.0640. Euro/yen 121.32. Dollar/yen 114.04. Pound 1.2644. Euro/pound 0.8415. Aussie dollar 0.7421.

WTIC oil is down -0.3% to 50.91. Brent oil is off -0.6% to 53.65. Natural gas is down -0.9% to 3.47. Metals sink. Gold 1168. Silver 16.44. Copper is down -1.6% to 2.60. XLF -0.8%. GS -0.4%. JPM -0.5%. WDAY -15.3%.

Treasury  yields are; 2-year 1.13%, 5-year 1.87%, 10-year 2.42%, 30-year 3.08%. The 2-10 spread is 129 bips.

Fed’s Brainard discusses new technologies that benefit data collection and analysis in the financial industry. She says the Fed and other institutions must remain on guard against cyber threats and computer hacks. Brainard avoids commenting on monetary policy ahead of the FOMC rate decision meeting in 11 days.

At 9:15 AM, markets are steady. A rise in oil helps stabilize the futures. S&P -2. Dow -16. Nasdaq -5. Russell -1. VIX 14.15. DAX -0.6%. CAC -1.2%. FTSE -0.8%. MIB -0.9%. WTIC oil 51.09. Brent 53.81. Gold 1173. Silver 16.58. Copper 2.604.

Treasury yields are; 2-year 1.13%, 5-year 1.87%, 10-year 2.43%, 30-year 3.09%. Markets are sanguine after the jobs data. German bund 0.33%. UK gilt 1.44%.

At 9:30 AM EST, US stocks begin trading sideways. SPX 2191. INDU 19173. COMPQ 5245. RUT 1312. VIX 14.17. Banks are punished. XLF -0.5%. KRE -0.6%. JPM -0.3%. BAC -0.5%. C -0.4%. WFC -0.7%. Energy is strong as oil prices lift. XLE +0.3%. Chips recover. SOX +0.7%. Utilities lead higher. XLU +0.9%.