In my view November’s unemployment report was strong in all dimensions, a strength few had expected. The large 321,000 gain in non-farm payrolls, together with the 44,000 upward revision to the two proceeding months increases the odds the FOMC will increase interest rates sooner than many expect.
As all know the Federal Reserve has stressed monetary policy is data not time dependent, data primarily based upon labor.
The six month average gain in non-farm payrolls is now at an eight year high. Unlike the previous five years, job creation has accelerated during the second half of the year.
In my view the increase in average hourly earnings and hours worked were the most significant aspect of this report. Moreover the breadth of industries hiring was the broadest since 1998. The labor participation rate (LPR) remained unchanged however as more workers returned to the workforce.
The question at hand is whether or not the Federal Reserve will drop the phrase “considerable time” at next week’s FOMC meeting? I will place the odds of such around 40% and if December’s labor report is as strong as November’s, this phrase will disappear at the conclusion of the January meeting.
How will the markets respond to such inevitability? As mentioned several times, there has been seven tightening cycles since 1971 and according to Capitol Economics the average S & P 500 return in the 21 months after the first tightening had occurred is 11.4%. I must write the averages first decline between 10% and 12% but then rebound.
Last week I opined the collapse of oil prices and energy issues may be regarded as the biggest surprises of 2014. I can argue if the FOMC changes monetary policy by March, the collapse of the “must own” and “over owned” alternative income/dividend stocks as well as investment grade rate bonds will be the financial decimation of 2015.
I will also argue “hard asset” companies and commodity entities may outperform for historically these issues rise when monetary policy is tightened in a moderate inflationary environment.
Equities rallied nominally on the data while treasuries fell moderately. How will the markets perform this week?
There is a moderate economic calendar as wholesale and business inventories, retail sales, several inflation and housing statistics as is a confidence survey are released.
Last night the foreign markets were mixed. London was down 0.81%, Paris down 0.81% and Frankfurt down 0.56%. Japan was up 0.08% and Hang Sang up 0.19%.
The Dow should open nominally lower on disappointing economic data from our trading partners. The 10-year is off 1/32 to yield 2.32%.