Traders Cherry Pick the Jobs Report

There was seemingly something for everyone in this morning’s jobs report.  It can simultaneously feed into the narrative of a solid labor market and a weakening one.  And if one is inclined to believe that the labor market is softening, then the inflationary aspects can be overlooked – at least if one is inclined to do so.  Considering that almost anything market-related is being viewed with a “glass half-full” viewpoint, then it should be unsurprising that this mixed report is being viewed in a favorable manner.
The headline Nonfarms Payrolls data was an upside surprise, coming in with a gain of 227,000 in November, ahead of the final consensus of 220K.[i]  That is well above October’s 12K gain, which was revised up to 36K.  Furthermore, the two-month revision was a net gain of 56K.  Earlier this week we had a surprise increase in JOLTS job openings and a miss on the ADP Employment Change.  The JOLTS data proved a more accurate predictor this time. 
We also had Average Hourly Earnings rise 0.4% on a monthly basis, ahead of the 0.3% consensus.  When we annualize that last three months’ readings (0.4, 0.4, 0.3), that implies that wages are rising by more than 4%.  That seems to be a bit above the Fed’s 2% inflation target, no?
But instead, the bond market chose to focus on the aspects it liked.  The Unemployment Rate rose to 4.2%, above the 4.1% that was both last month’s reading and the consensus.  Combine that with a decline in the Labor Force Participation Rate to 62.5%, below last month’s 62.6% and the 62.7% consensus, and one could make a credible case that the labor market is indeed slowing. 
That is why we see 2-year yields falling 5 basis points as expectations for a 25bp rate cut at the December 18^th FOMC meeting increase.  The CME FedWatch tool currently shows an 88% chance for a cut, up from 72% just prior to the report.  The IBKR ForecastTrader echoes that move, with expectations that the rate will be set above 4.375% have dropped from 28% to 15%.  This is in spite of – or perhaps because of – Chair Powell’s comments yesterday saying that the Fed could be “cautious” about cutting rates.  Again, with a glass half-full reading, it could imply that any caution will be in the future, not the present. 
Meanwhile, stocks are meandering a bit.  Although stocks could have run with the notion that the stronger payrolls report would lead to a stronger economy, and that the combination of a strong economy (the Atlanta Fed’s GDPNow reading is up to 3.3%) along with rate cuts would be a dream scenario, the early rally attempt saw no follow through except in the tech sector.  There we see a solid bounce, with six of the Mag 7 stocks higher, led by Meta Platforms (META).  They would certainly enjoy seeing a forced sale of TikTok, which was upheld by a court ruling this morning.
We of course can’t rule out the possibility of a late Friday rally.  They seem to occur more often than not lately.  But with the mixed messages from today’s report, it is less of a foregone conclusion than usual.

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[i] The IBKR ForecastTrader got this one correct, though barely.  There was a 68% “Yes” probability for whether payrolls would be above 225k.  It wasn’t by much, but a win is a win.