INSTANT VIEW 3-Nov US payrolls came in strong, with worrisome wage rises

NEW YORK, Dec 2 (Reuters) – U.S. employers hired more workers than expected in November and raised wages despite mounting worries of a recession, which could complicate the Federal Reserve’s intention to start slowing the pace of its interest rate hikes this month.

Nonfarm payrolls increased by 263,000 jobs last month, the Labor Department said on Friday. October was higher to show payrolls rising 284,000, more than the 261,000 as previously reported.

Economists polled by Reuters had forecast payrolls increasing 200,000. (Full Story) []

MARKET REACTION:

STOCKS: S&P e-mini futures ESc1 extended sharply lower, pointing to an ugly opening on Wall Street, and were last down 1.5%

BONDS: The yield on 10-year Treasury note jumped US10YT=RR and was last up 6.9 basis points on the day at 3.596%; The two-year US2YT=RR U.S. Treasury yield surged up 9.8 basis points from Thursday at 4.352%.

FOREX: The euro EUR=EBS turned 0.64% lower against the dollar, while the dollar index .DXY reversed higher

COMMENTS:

MIKE BELL, GLOBAL MARKET STRATEGIST, J.P.MORGAN ASSET MANAGEMENT, LONDON (emailed)

“A recession in the US is now more widely forecast than at any time in the last 50 years. So, somewhat counterintuitively, if the labour market holds up well next year and wage growth remains strong, forcing the Fed to keep hiking rates further than the market expects, then markets are unlikely to respond kindly. A rise in unemployment that helps bring wage growth and core inflation down and allows the Fed to cut rates at some point next year or in 2024, would probably be digested surprisingly well by equity markets.

“We are in a situation where good news for the economy is bad news for the markets and vice versa.”

TIM HOLLAND, CHIEF INVESTMENT OFFICER, ORION ADVISOR SOLUTIONS, OMAHA, NEBRASKA

“The better-than-expected jobs report is good news for the American worker, and bad news, at least short-term, for risk assets as it supports a hawkish monetary policy by the US Federal Reserve.”

“That said, it is worth noting that the jobs report is backward looking, and that continuing jobless claims have been climbing. There is a good chance the labor market will slow meaningfully in the first half of 2023, forcing the Fed to consider a much more benign policy stance sooner than many expect.”

JUAN PEREZ, DIRECTOR OF TRADING, MONEX USA, WASHINGTON, DC

“Volatility in the currency market should remain if we have to doubt the effectiveness of central bank policy, as raising interest rates has not managed to make enough of a dent to the economy. For now, the buck may recuperate some ground, but we will see if other central banks will keep up or we shall witness more divergence in 2023.”

YUNG-YU MA, CHIEF INVESTMENT STRATEGIST, BMO WEALTH MANAGEMENT, CHICAGO

“Fifty (basis points) is still on the table, of course it is a little bit more of a question than it was before, that is a fair statement. Fifty is still the most likely scenario but what we see now is this report gives the contingent of the more hawkish members of the FOMC a bit more firepower, a bit stronger voice, a bit more reason to be aggressive in their projections that they come out with in December when they put out the dot plots, put out where they think the terminal rate will be and where they think rates will be throughout 2023 and even into 2024. So that is probably the most likely scenario, that we still get fifty but we get a more hawkish tone at the meeting in two weeks.

“The futures are moving a lot, the market does seem like it is reassessing that whole (Powell) speech right now, that whole discussion, because if we then get a much more hawkish statement and projection in two weeks that is a very different scenario.”

QUINCY KROSBY, CHIEF GLOBAL STRATEGIST, LPL FINANCIAL, CHARLOTTE, NORTH CAROLINA

“The market expected a weaker number, closer to consensus estimates; 263,000 jobs is obviously more than consensus. The Fed rate hikes have begun to soften the employment landscape; however, the economy remains resilient. Employers have been freezing job hiring, but they are reluctant to let go of workers given how difficult it was to find workers. That said, smaller companies have been more aggressive with layoffs. This is not what the market wants to see at this point. We’re still showing a slowing in the labor market, but it’s not enough to satisfy the Fed and to satisfy the market.

“Wages climbed higher. This is not what the Fed wants to see. In fact, they want to see it pull back. Hourly wages are a major concern for the Fed. This and rents are two of the major focus (points) for the Fed.”

ART HOGAN, CHIEF MARKET STRATEGIST, B. RILEY, NEW YORK

“In the counterintuitive world that we’re in right now, good news seems to be bad news for markets.”

“But I think only temporarily.”

“I think that, this will settle into the narrative that the biggest conundrum the Fed has is that while inflation is coming down, the labor market remains tight. And as long as the labor market remains tight, they’re going to have to remain diligent at the job they’re doing.”

“Does that actually change what we think the Fed is going to do in December, which is less than two weeks away? Probably not.”

“So, if in fact the Fed were to be able to orchestrate the elusive soft landing, one of the factors you need is a tight labor market.”

RYAN DETRICK, CHIEF MARKET STRATEGIST, CARSON GROUP, OMAHA

“It’s further confirmation that the employment backdrop is on fairly firm footing. The big concern is we are back on inflation watch. The hourly wages came in hotter than expected, so that potentially will catch the attention of the Fed and maybe the Fed could be a tad more aggressive with their rate hikes in the near term.”

“Today’s wage growth strength kind of runs in the face of some of the recent improving inflation data that we’ve been seeing. So this doesn’t make a trend, but it clearly has caught the market and probably the Fed’s attention.”

“This month came in better than expected, but some of the previous months were revised a tad lower, but it’s still an impressive showing for the U.S economy and the employment backdrop further suggesting we’re not close to a recession.”

“We have had a huge rally the last two months on the hopes that the Fed take its foot off the pedal a little bit. Recently, Jerome Powell hinted that could be the case. But now today is a kind of a reminder that it might not be so simple. The Fed still might have to remain a little more hawkish.”

PETER CARDILLO, CHIEF MARKET ECONOMIST, SPARTAN CAPITAL SECURITIES, NEW YORK

“The top number was higher than expected, but what’s disappointing is hourly wages. This is a strong report, and bit of a disappointment. Maybe it’s stronger than expected due to seasonal factors.”

“It’s a number that’s consistent with an economy that seems to be resilient. And it presents an increasing challenge for the Fed. It guarantees a 50-basis-point (interest rate) hike this month and it adds a question mark as to what will happen thereafter, whether the terminal rate needs to be hiked.”

“This adds a challenge for the Fed now. If this trend continues, instead of a pause in the first quarter it might be extended to the second quarter and that’s what’s affecting the market.”

“But there might be seasonal factors at play here, let’s not forget that.”

DAVID RUSSELL, VICE PRESIDENT OF MARKET INTELLIGENCE, TRADESTATION

“Today’s stronger jobs data reduces hopes of a dovish turn by the Federal Reserve and at the same time there are a lot of other forces that continue to argue in favor of the Fed going with 50 (basis points) in December. Today’s 263,000 jobs do not change the message we got from the Fed this week from Jerome Powell.”

“It takes away some of the enthusiasm and some of the hope, but there are a lot of other indicators pointing in the direction that the Fed needs to pause. There were a lot of negative things that would argue in favor of slower rate hikes.

“I think we have a lot of hopes and they are diminished but not destroyed.”