S&P 500 Index, NASDAQ Composite Attempting to Recover from Knee-jerk Reaction to Hot Labor Market Report

The benchmark S&P 500 Index and the tech-weighted NASDAQ Composite are down late in the session on Friday but well off their intraday lows as traders try to claw back earlier losses.

U.S. equities took a hit while U.S. Treasury yields rose as investors shifted bets toward a more hawkish-than-expected Federal Reserve response to a strong U.S. labor market report. The catalyst behind the price action is the November Non-Farm Payrolls report that showed employers hiring more workers than expected in November and raising wages despite recession fears.

At 19:00 GMT, the blue chip Dow Jones Industrial Average is trading 34294.50, down 100.51 or -0.29%. The S&P 500 Index is at 4054.08, down 22.49 or -0.55% and the NASDAQ Composite Index is trading 11394.84, down 87.61 or -0.76%.

Hotter-Than-Expected Jobs Report

The U.S. Labor Department reported that nonfarm payrolls increased by 263,000 jobs last month compared with economist expectations for 200,000 jobs. And average hourly earnings increased 0.6% up from 0.5% in October. Traders were pricing in a rise of 0.3%. The only bright spot in the report was the Unemployment Rate, which came in unchanged at 3.7% although the Fed would’ve loved to see an uptick.

The numbers suggest that companies doing the hiring are not afraid of higher interest rates. Firstly, they must feel they need the workers, secondly, they must be confident that even in a rising interest rate environment, they will make a profit.

Leisure and Hospitality Industry Led the Job Gains

The internal figures of the report show that leisure and hospitality led the job gains, adding 88,000 positions. This is not a real surprise since consumers are traveling and going out to restaurants after being locked down by the pandemic.

Surprisingly, the construction industry also added 20,000 positions even in the wake of four consecutive 0.75 percentage point rate increases that have hurt the housing industry.

Immediate Reaction: Bearish for Stocks

Sellers took immediate control of the stock market when they saw the huge headline number. But it may have been the jump in average hourly wages that delivered the crushing blow. Nonetheless, after the initial sell-off, prices stabilized as traders attempted to claw back the earlier losses.

The news was shocking enough to alter the bets of traders on the potential of future rate hikes. After the report, traders were wagering that the Fed could raise rates to 4.92% by March 2023, up from a range of 3.75%-4%. For May 2023, traders are now looking for a range of 5%-5.25%. This is up from 4.75%-5% before the report.

The Bearish News May Not Last

In my opinion, if the NFP report was truly bearish, the stock market would have sold-off all session long. Instead the selling pressure subsided very quickly. This suggests the weakness was fueled by long liquidation by speculators betting on a bullish report.

Investors should keep in mind that the jobs report is stale data, meaning it looks backward. Looking at the climbing jobless claims and the recent layoffs especially in the technology sector, there’s a good chance that the labor situation won’t show signs of weakening significantly until the start of the first quarter of 2023. If jobs growth collapses enough at that time, it may even encourage the Fed to reduce the size of its rate hikes to 25 basis points instead of the 50 basis points that are being forecast for December.

Short-Term Outlook

Friday’s jobs data represents the start of a 10-day time period that could feature volatile, two-sided trading as investors jockey for position ahead of the Fed’s interest rate decision.

Prices could chop around until at least Dec. 13 when the November consumer inflation figures are released, just one day ahead of the Fed’s rate decision and monetary policy statement on Dec. 14.