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Jobs Data Looks to Restore Market Confidence in Likely Fed Move

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December 4, 2015

U.S. stock markets added to early modest gains and the U.S. dollar rose after November hiring stats proved stronger than Wall Street expected. The move marks a slim recovery so far from deep stock losses this week as the Street has worried that the Federal Reserve could launch an aggressive rate-hike campaign while the economy remains vulnerable.

The employment report is seen doing little to sway the Fed from a potential mid-month interest rate move, say industry analysts, which would be the first hike in nearly a decade. The report also instills some confidence that tempered Fed action to take away recession-era policy is warranted, and an endorsement of an improving U.S. economy. Of course, the U.S. is tilting toward higher rates at the same time that other major central banks continue to inject extra stimulus into their slow-moving economies.

As reported this morning, the U.S. economy added 211,000 new jobs in November, topping a general Street consensus for about 200,000 nonfarm jobs. The unemployment rate was unchanged at 5%, kept in place by more people joining the labor force in search of work, Labor Department statistics show. The labor-force participation rate was up a tick to 62.5%. Employment gains for October and September, meanwhile, were revised up by a combined 35,000. In fact, stats show that 298,000 new jobs were created in October instead of 271,000, for the biggest gain of 2015.

Now, wage growth is still a potential sticking point and fodder for dovish Fed members. Average hourly wages paid to American workers rose 0.2% in November, a bit slower compared to the prior month. The typical worker earned $25.25 an hour, up 4 cents from October. From November 2014 to November 2015, hourly wages rose 2.3%, falling from a 2.5% pace in October that industry economists say had raised hopes of rising wages in the months ahead.

At last check, short-term Fed funds futures market traders have priced in a 79% chance that the Fed activates the first interest rate hike since 2006 when it wraps that two-day session on December 16, according to pricing calculations provided on the CME Group’s FedWatch Tool. From here, traders are trying to speculate on how aggressively the Fed could move in its pledged efforts to return policy to “normal” after extreme measures were put in place during the last recession.

Uncertainty for the Fed pace was reflected in this week’s stock action. The Dow Jones Industrial Average ($DJI) dipped into negative territory for the year. The S&P 500 (SPX) shed nearly 30 points on Thursday alone (figure 1), amid aggressive selling in the fixed income markets. The CBOE Volatility Index (VIX) was up almost 15% in Thursday’s session and could be worth close attention today. If VIX, the market’s “fear gauge,” lags the broader market move today, it could be a sign of increased volatility, especially heading into that Fed meeting.

SPX stock chart

FIGURE 1: CAUTION EMERGES.

The S&P 500 (SPX), charted on the thinkorswim® platform, tickled the psychologically significant 2100 line in Tuesday’s session but after back-to-back retreats finished Thursday more than 50 points off that mark. Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

OPEC Decision Day. Crude oil prices, still at multi-year lows, did recover some ground late week as traders position for a big OPEC meeting. OPEC oil ministers are largely expected to stick to a strategy of maintaining output, even amid growing supplies, relatively cheap oil, and questions about global demand. Despite vocal opposition from member countries such as Venezuela and Algeria that are suffering from the low oil prices, analysts foresee OPEC’s most influential member Saudi Arabia remaining firm as it seeks to defend its share of the market. Oil prices were lifted on Thursday by news that Saudi Arabia would propose a production cut if non-OPEC members, such as Russia, also adhere to the cut, the Wall Street Journal said. Keep an eye on oil developments, which could play into stock trading today.

Lilly Ends Diabetes Drug Development. Eli Lilly & Co. (LLY) said on Friday it was ending development of a potential diabetes treatment, known as basal insulin peglispro (BIL), after disappointing trial results. The drug maker announced earlier this year that it was delaying regulatory submission of BIL to better understand the potential effects, if any. The company expects the decision on BIL will result in a $55 million charge to research and development expenses. Lilly did say its earnings-per-share outlook remains unchanged. The stock is lower in early action.

Avon Nearing a Deal? Avon Products (AVP) jumps early Friday amid a Wall Street Journal report that the makeup peddler is close to selling part of its business to a private-equity firm just as an activist investor is readying its own campaign for the 130-year-old company. AVP is in advanced talks to sell its North American business to Cerberus Capital Management LP, according to people familiar with the matter, the WSJ says. As part of the deal, Cerberus would make a minority investment in Avon that would strengthen the company’s balance sheet, the people said. Cerberus would become Avon’s biggest shareholder and might get board seats, the report says.

Good Trading,

JJ

@TDAJJKinahan

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