Jobs Report: Slower Hiring May Lift S&P 500, But Fed Warns Against Market Rally

The S&P 500 falls as investors grow cautious about the Friday jobs report, which could determine the size of the next Fed rate hike.

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May 14, 2023 • 3 min read

The Friday jobs report will likely show that U.S. employers added 200,000 new payroll positions in December, with 175,000 of those coming from the private sector. The numbers are the lowest since December 2020, but some data suggests that they could be even lower. This could lead to an S&P500 relief rally and shrink the odds of the Fed raising its key rate above 5%.

There's still room for a rebound, as the S&P 500 ended Thursday at a level that was lower than it had been in two months. The minutes of the Federal Reserve's meeting last month, released on Wednesday, included a warning not too subtle to investors to not bank on a sustained S&P 500 rise. The minutes stated that "an unwarranted ease in financial conditions" would work against Fed policies and "complicate" efforts to restore prices stability.

In the Fed's policy outlook, hiring and the unemployment rate are equally important. According to projections released by the Fed last month, the unemployment rate is expected to increase to 4.6% from its current 3.7% by 2023. Fed chair Jerome Powell said that wage growth must be reduced to 3.5% in order to meet the 2% target for inflation.

As long as unemployment remains below 4%, and wage growth is close to 5%, rate hikes will continue. Wall Street economists anticipate that Friday's employment report will show the unemployment rate at 3.7%, while wage growth is expected to drop to 5%.

After a 0.6% increase in November, the average hourly earnings should rise by 0.4% this month. This was due to a 2.5% pay increase for transportation workers, which led to the strong gains in November. This was likely due to the recent national rail union negotiation which resulted in an immediate pay increase of 14%. Another big wage increase in transportation could be seen in the December jobs report. Only half of the 12 unions had approved the agreement early enough for it to appear in November's data.

The hiring trend has clearly slowed, with a monthly average of 272,000 new jobs in the three-month period through November. This is down from 374,000 in the previous 3-month period. The Labor Department's November Job Openings Summary and Labor Turnover summary released on Wednesday indicated a further slowdown.

The net hiring number, which is the difference between hires and separations, dropped to 185,000 from 355,000 in September, and 431,000 in October. The monthly employment report indicated a 263,000 increase in jobs for November, but this was based on an employer survey conducted at the mid-month.

It is clear that the hiring momentum slowed in November and probably continued into December. This deduction is supported weekly data on jobless claims. The number of people claiming benefits continues to rise, even though initial claims are historically low. In the week ending Dec. 17, 1,7 million people received benefits. This is up from 1,5 million the week of Nov. 5, and 1,36 million on Oct. 1.

Although layoffs remain low, it appears that hiring has slowed, making finding new jobs for those laid off more difficult.

Financial markets have priced in 61% of the odds that Fed will reduce its rate hike to 25 basis points on February 1. The odds of a second half-point rate hike have risen from 30% to 39% since Wednesday. This repricing was likely due to stronger job data released on Thursday morning. ADP, a payroll processor, estimated that private employers created 235,000 new jobs in December. This compares to an upwardly revised number of 182,000 for November. New jobless claims fell to 204,000 from 223,000 in the previous week.

Powell said that the rate of Fed rate increases is not important. He says that what matters is the rate and how long it stays there. Investors are concerned about the rate of increases. The Fed will find it difficult to continue raising rates once the job growth slows down or even turns negative. If this happens before the Fed raises rates above 5%, it could lead to a soft landing for the U.S.

Stock market activity dropped 1.2% after Thursday's positive jobs report. The Dow Jones Industrial Average fell 1%, and the Nasdaq Composite 1.5%.

The S&P 500 and Dow Jones are close to recent lows after Thursday's decline. This could change if the Friday jobs report is positive.

A softer than expected jobs report on Friday could provide some relief to the S&P 500 while increasing the odds of a quarter point rate hike at the Fed’s next meeting. A sustained S&P 500 rise is unlikely to occur in the near future as recession clouds continue to grow and Fed rates are raised.

To stay informed about the current market trends and their implications for your trading, read IBD’s The Big Picture daily column in the afternoon.