Watched Pot: Market Lacks Conviction as Clock Ticks Toward Friday's Jobs Report

(Thursday market open) Risk appetite seems to be waning on Wall Street ahead of tomorrow’s jobs report and next week’s Federal Reserve meeting and inflation data. These three developments could be forceful catalysts for the market’s next move, leaving investors disinclined to get too far out in front of the numbers.

That appeared to be the case yesterday when an early stock market rally flamed out. Once again, attempts at key technical resistance of 14,350 for the Nasdaq Composite® ($COMP) and 4,600 for the S&P 500® index (SPX) failed, and money flowed instead into Treasuries and the U.S. dollar, sometimes perceived as potential “safe havens” in uncertain times. The equities weakness included eight of 11 S&P 500 sectors along with small caps, breaking a pattern earlier this week where either mega caps or small caps rallied.

Major indexes wobbled in premarket action, but the tone improved approaching the opening bell as futures trading moved into the green. It’s unlikely we’ll see big moves today ahead of tomorrow’s jobs data, barring major unexpected developments.

Trading on Wednesday had a defensive tone, according to Liz Ann Sonders, Schwab’s chief investment strategist, noting strength in utilities and weakness in technology shares.

Analysts expect tomorrow’s Nonfarm Payrolls report to show November jobs growth of 180,000, according to Trading Economics, with unemployment unchanged at 3.9%. As worries mount about a possible economic slowdown, the risk could be shifting to one where bad news actually gets traded as bad news, unlike earlier this year when a poor jobs report often stirred bullish hopes that weakening data would ease the Fed’s rate tightening.

“We’ve received evidence of slack developing in the labor market, whether its last month’s soft Nonfarm Payrolls report, rising continuing claims, this Tuesday’s job openings report, or Wednesday’s tepid ADP® Employment report,” said Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research.

“Investors are OK with seeing continued evidence of that theme Friday, but they probably don’t want to see anything significantly below estimates because this could begin to draw into question of ‘how much’ the economy is slowing,” he continued. “Currently, soft data are being embraced as they speak to a soft landing, but if data begins to slow too much it might begin to bring in growth concerns and raise worries about next year’s earnings expectations.”

Morning rush

• The 10-year U.S. Treasury Yield (TNX) rose three basis points to 4.15%.
• The U.S. Dollar Index ($DXY) pulled back to 103.94.
• Cboe Volatility Index® futures climbed to 13.15 but remain near recent long-term lows.
• WTI Crude Oil (/CL) climbed back to $70.3 per barrel after closing below $70 yesterday for the first time in five months.

Just in

Weekly Initial Jobless Claims of 220,000 this morning was in line with the Briefing.com consensus of 223,000 and probably won’t have a dramatic impact on the market. Continuing claims moved off a two-year high and fell back below 1.9 million. Still, the four-week moving average for continuing claims of 1.872 million remains the highest in two years. Investors should consider watching the four-week average, which gives a better view of the trend. Overall, it appears to be getting harder to find a job despite this week’s continuing claims decline of more than 60,000.

Earlier today, investors got a look at the Eurozone’s Q3 Gross Domestic Product. At –0.1% quarter-over-quarter, the sequential number was as expected. However, flat year-over-year growth missed expectations for a 0.1% gain. Any way you chalk it up, economic growth continues to look soft across the Atlantic judging from these data points.

Things looked a bit brighter on the Pacific side of things, where exports from China grew 0.5% in November when analysts had expected a drop, according to Trading Economics. This data may help explain why crude oil bounced back a bit this morning. However, the rise in exports came as manufacturers cut prices.

What to watch

The data everyone’s been waiting for is on deck at 8:30 a.m. ET Friday. Here’s consensus for November Nonfarm Payrolls, according to Trading Economics:

• November jobs growth: 180,000, versus 150,000 in October
• November unemployment: 3.9%, versus 3.9% in October
• Average hourly earnings growth: 0.3%, versus 0.2% in October
• Average weekly hours: 34.3, versus 34.3 in October

Analysts expect a big turnaround in manufacturing jobs growth from negative in October to positive in November thanks mainly to the end of the auto workers’ strike. Labor force participation is seen unchanged at 62.7%, about even with the pre-pandemic level, while year-over-year wage growth could tick down to 4% from October’s 4.1%.

Softer labor numbers earlier this week fueled ideas that the Fed’s rate hikes slowed jobs growth, but any given monthly employment report could deliver a surprise. To smooth out the data, investors might want to check the three-month average of jobs creation. It fell to 204,000 in October from 233,000 in September. That would have been considered quite strong in pre-pandemic times, as the economy only needs to create about 100,000 jobs a month to match increases in the working age population, according to the World Economic Forum.

Before the payrolls data, investors get a numbers feast from Japan later Thursday U.S. time, including Gross Domestic Product (GDP) and household spending.

Back home, this morning includes a couple of Treasury note auctions. Demand appeared to improve for U.S. debt late last month, one reason yields fell.

Stocks in spotlight

The earnings calendar gets crowded this afternoon with results expected from Lululemon (LULU) and Broadcom (AVGO).

Lululemon shares have been on a roll lately and may have gotten another boost last week when athletic retailer Foot Locker (FL) impressed Wall Street with its quarterly results. In its last earnings report at the end of August, Lululemon reported double-digit total comparable sales growth and forecast 17% to 18% revenue growth for fiscal Q3. The company said it saw growth trends accelerate in North America as Q3 began, and today’s earnings could shed light on whether that persisted as the quarter continued.

Last time out, a slight beat of Wall Street’s expectations didn’t help Broadcom shares, possibly reflecting the enterprise software and semiconductor company’s 4% estimate for Q4 revenue growth. That was in line with analyst expectations but arguably didn’t blow anyone away. Guidance is key again this quarter as investors seek fresh evidence that AI has an impact on Broadcom’s financials. Broadcom earned an estimated $9.71 per share in Q3, according to Nasdaq.

Slumping shares of Dollar General (DG) bounced 3% in premarket trading after the retailer beat analysts’ earnings expectations and reaffirmed guidance. Same-store sales for the quarter declined, but not as much as some on Wall Street had expected. Still, the company continues to struggle, noting “a significant headwind from inventory shrink.” Dollar General projects same-store sales for fiscal 2023 to be flat to 1% lower.

Oracle (ORCL) earnings loom Monday, followed by home builder Lennar (LEN) later next week.

Eye on the Fed

Early today, futures trading pegged chances at 97.5% of the Federal Open Market Committee (FOMC) holding its benchmark funds rate steady following its December 12–13 meeting, according to the CME FedWatch Tool. Chances of rates staying on pause following the FOMC’s January 30–31 meeting are 83.8%. The market prices in a 61% chance that rates will be lower than now after the Fed’s March meeting.

A rate decision and updated economic and rate projections are due next Wednesday afternoon, followed by Fed Chairman Jerome Powell’s press conference. Last month, he said the FOMC isn’t discussing rate cuts, and he’ll probably be asked about that again Wednesday.

The futures market bakes in almost 100% chances of a pause at next week’s meeting. However, next year is becoming more the focus as investors build in firm chances of rate cuts as soon as March. It’s now been four months since the most recent of 11 Fed hikes that lifted interest rates to current 22-year highs of between 5.25% and 5.5%.

Thinking cap

Ideas to mull as you trade or invest

’60s nostalgia: A few months ago, when interest rates steadily climbed and the dollar and yields rose to multi-year highs, investors likely would have welcomed a drop in crude oil prices. This week, U.S. crude’s descent below $70 per barrel for the first time since early July appeared to receive a less joyous Wall Street reception. Rising U.S. stockpiles and concerns about global growth combined to gang up on crude and remind investors that so-called “black gold” can be a barometer for economic trends. Since rising to nearly $78 on November 29, front-month U.S. WTI Crude Oil futures have registered five-straight lower sessions, their longest red stretch in over a year. That said, we’re in a seasonally weak time of year for crude, and the market recently flipped into contango, where future prices hold a premium to the spot price. However, looking out into the CME futures complex, traders don’t build in much of a spike. Contracts huddle right near $70 for most of next year, suggesting that oil market participants, at least, don’t necessarily see demand making a big comeback.

Cash sidelined: One challenge for slumping “defensive” sectors is all the cash tied up in high-yielding money market funds. Three of the four S&P 500 sectors in the red for 2023 are ones that compete with yields for investor dollars: health care, utilities, and consumer staples. Despite a recent pullback, yields remain above 4%—levels that would have been considered quite steep a few years ago. The question is whether the recent pullback gains traction, and if so whether it attracts some of the cash piled up in banks now. About $5.76 trillion cooled its heels in money markets as of late November, Bloomberg reported, close to twice the 2019 level. Retail investors appeared to dip their toes back into stocks over the last month, helping fuel the November rally, and it seems like there’s more dry powder where that came from if people want to use it. On the other hand, some money markets still offer 5% yields without the volatility of stocks and could remain more competitive versus defensive sectors than during the 2010–2020 era.

Bond outlook: Interest rates have likely peaked, which could lead to lower Treasury yields and positive returns for fixed income investors in 2024, said Kathy Jones, Schwab’s chief fixed income strategist, in her latest post. However, the road won’t necessarily be smooth, with uncertainty about the Federal Reserve’s policy moves potentially creating volatility. “The market is probably pricing in too much easing too soon by the Fed, and that’s a source of volatility,” Jones added. She expects the Fed to lower rates two to three times in 2024, with the first cut coming in June.

Calendar

Dec. 8: November Nonfarm Payrolls, preliminary University of Michigan December Consumer Sentiment.

Dec. 11: Oracle (ORCL) earnings.

Dec. 12: November Consumer Price Index (CPI) and core CPI.

Dec. 13: FOMC rate decision, November Producer Price Index (PPI).

Dec. 14: November Retail Sales, and expected earnings from Costco (COST) and Lennar (LEN).