Perspective: Morning Commentary for December 8

December 8 – The focus is on jobs today, with the release of the government’s monthly jobs report to set the tone for expectations for next week’s meeting of the Federal Reserve. That report held a few surprises that resulted in mixed results on Wall Street as traders digest the various numbers within the report. The VIX is trading below 13 this morning, reflecting ongoing complacency on the Street, while the dollar index is following Treasury yields higher on the data release, trading near 104.2 after setting fresh three-week highs on the data. Yields on 10-year Treasuries are trading near 4.23%, while yields on 2-year Treasuries are trading near 4.71%, as both now come off their initial surge on the data release. Crude oil initially found an extra bump from the jobs report, pushing prices 2% higher following yesterday’s fall to fresh five-month lows. The grain and oilseed markets are again mixed this morning, with soybeans getting a bump from Brazil weather risks.

The economy created 199K jobs in November, up from 150K in October and above analyst expectations of 180K. The unemployment rate fell to 3.7% in November, down from analyst expectations that it would remain at 3.9%. In fact, today’s unemployment number fell below the lowest trade guess going into the report. The job participation rate ticked higher to 62.8% as expected. Private payrolls rose by 150K in November, matching analyst expectations, although the October number was revised to 85K, down from 99K previously. The number of long-term unemployed slipped lower to 1.2 million people in November. The number of people employed part time for economic reasons fell by 295K to 4.0 million in November. These are people who want a full-time job, but they have been unable to find a full-time job, or they have had their hours reduced by their employer. Manufacturing added 28K jobs in November, after cutting 35K in October. Healthcare added 77K jobs in November, above the average monthly gain of 54K, while government added 49K jobs, in line with the average for that sector. However, retail employment subtracted 38K in November, which is a bit disheartening as the holiday shopping season gains momentum, or not.

Average hourly earnings rose 0.4% month-on-month in November, up from analyst expectations of 0.3% gains, and doubling the pace seen in October. Average hourly earnings were up 4.0% year-on-year in November, matching the previous month and matching analyst expectations. The average hourly workweek rose to 34.4 hours, up from analyst expectations that it would remain unchanged at 34.3 hours. The increase in the workweek combined with a bigger than expected month-on-month increase in hourly earnings to suggest that wage inflation remains quite sticky, combined with a lower unemployment rate and higher than expected job creation number to support the idea that the labor market is tightening again, rather than continuing to soften. This fits with yesterday’s weekly jobless numbers that showed a similar trend in the longer-term numbers. Fed fund futures had been pricing in expectations that we’ll see our first rate cut in March prior to the data release, but those odds are now backing down a bit. I personally do not believe that we will see a rate cut in March, May, or perhaps not before late in the year, unless we see a much more dire economic picture unfold. I base that on what the Fed has clearly stated as being a priority. It has repeatedly said that it doesn’t want to make the same mistake it made in 1980 when it pivoted too soon, allowing inflation to come roaring back. As such, it has stated many times that it would rather error on the side of being too high for too long. It has further stated that it is most concerned with sticky inflation in the “super-core” data, which is largely driven by wage inflation, which remains quite sticky.

Nothing is going to come easy in Center-West Brazil, with the weather pattern continuing to walk the fine line between disaster and a record crop. The rains are very uneven – unlike the typical monsoon rains – and therefore some are blessed with very healthy crops, while a short distance away the crops are dying. The markets only care about how the good and the bad all add up, and thus far the local private estimates suggest that they add up to an adequate crop to meet demand without raising U.S. exports. That may change in the future, but so far, we lack evidence of such a change, even though the forecast suggests that we will continue to walk this fine line in Center-West Brazil. The evidence continues to suggest that we are on the “well-supplied” side of that line, but the line is fine enough that the market sees fit to maintain some risk premium in the price until more is known. We should know a lot more by the end of the month when some of the early harvest results start coming in. Meanwhile, export demand for corn and wheat continues to come in on a regular basis, led by China, on signs that we may have put a near-term low in the market behind us. Soft red winter wheat has been the biggest beneficiary of the Chinese business of late, with hard red winter wheat still needing to find more business.