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Strong Job Numbers Throw Cold Water on Hopes for an End to Interest-Rate Rises

While employers expanded payrolls and raised pay more than had been forecast, they also appeared to compensate by reducing hours to save on labor costs.

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Jeenah Moon/Bloomberg

A man hears what he wants to hear and disregards the rest, Paul Simon observed years ago in “The Boxer.” Wall Street at times has seemed guilty of gravitating to a single narrative to the exclusion of contradictory information.

The recent rallies in stocks and bonds have been largely predicated on perceptions that the economy is weakening, a development that will slow the rise in interest rates by the Federal Reserve, hastening the end of the increases and auguring reductions in the coming year.

According to Bank of America analysts, the
S&P 500
index’s gain of 14.1% in the most recent two months, including 5.6% in November, puts the period in the 98th percentile for two-month returns, going back to 1936. Long-term Treasuries returned 7% in November, their biggest monthly gain since August 2019. By week’s end, the benchmark’s yield was just under 3.5%, down from a peak near 4.25% in late October.

Given the tailwind provided by lower interest rates, and the inclination shown by central bankers to lift rates this year, traders and investors naturally are rooting for factors that would lessen the imperative for dearer money. Such wasn’t provided by the latest employment report, released on Friday.

Nonfarm payrolls expanded by 263,000 in November, well above economists’ consensus estimate of 200,000, and a trading-desk “whisper number” in the 180,000 range. The guesses were even more awry when it came to pay. Average hourly earnings were up 0.6% in the latest month, twice the forecast gain, and rose at a 5.8% annual clip over the past three months.

Tellingly, this was the eighth straight month that the payroll data topped economists’ guesses, points out Jim Bianco, head of Bianco Research. Having been caught offside again, the markets initially sent bond yields up and stock prices lower. But upon further review of the details of the jobs report, the moves were tempered.

In particular, while employers expanded payrolls and raised pay more than had been forecast, they also appeared to compensate by reducing hours to save on labor costs. The average workweek declined by 0.3%, to 34.4 hours, which is equivalent to the loss of 380,000 jobs, writes David Rosenberg, the founder of Rosenberg Research, in a research note.

At the same time, he observes, the separate survey of households showed a 138,000 drop in employment, which followed a 328,000 slump in October. The headline jobless rate held steady at 3.7%, near the cyclical trough of 3.5%. This can be traced to drops in the labor force and the labor-force participation rate, both less-than-robust signs.

In contrast, Neil Dutta, the head of economic research at Renaissance Macro, contends that the wage gains are more than a one-month phenomenon and reflect robust growth, as measured in real terms, which include the effect of inflation. “The economy is more resilient than most expected, including me,” he says in an interview. And with incomes rising and gasoline prices coming down, consumers’ real spending power is increasing, he adds.

Indeed, Steven Blitz, chief U.S. economist at TS Lombard, sees additional evidence of economic reacceleration, making the Fed’s task of braking inflation more difficult. Along with the broad-based gains in payrolls, the third year of high nominal wage growth is about to begin, he adds in a client note.

The bottom line is that the Fed will probably have to lift its federal-funds target rate to at least 5%, and probably higher, to bring inflation back anywhere close to its stated 2% goal. Following Friday’s employment report, fed-funds futures were still pricing in a peak target range of 4.75% to 5% by midyear, although that was down from 5% to 5.25% a week earlier.

Fed Chairman Jerome Powell all but confirmed this past week that the pace of rate increases will slow to 0.5 of a percentage point at the next policy meeting, which concludes on Dec. 14. That would follow four successive 0.75-point hikes. On Dec. 13, data on November consumer prices will provide a major input to the deliberations.

The key issue will be the Fed’s estimates for the fed-funds rate and the economy for the coming year. The last set of projections, in September, had a median fed-funds forecast of 4.6%. Powell this past week allowed that the next estimate is apt to be higher. Those inclined to hear something more bullish could be disappointed.

Write to Randall W. Forsyth at


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