December 2, 2016

Stocks opened modestly higher (Dow -10 pts; SPX +.17%%; Nasdaq +.17%). Today is sort of the mirror image of yesterday’s session. Interest rate-sensitive sectors like utilities and real estate are up big while the cyclical sectors like financials and consumer discretion are lagging. The VIX Index is down a bit to 14. And bonds are up in price today. The 5- and 10-year Treasury yields ticked down to 1.83% and 2.39%, respectively. WTI crude oil, on the other hand, continues to drive higher, now trading around $51.20/barrel. Commodity traders are really taking this OPEC production deal seriously…for now.

Goldman Sachs’ Jan Hatzius says US financial conditions are improved over last year. Looking forward, Mr. Trump’s policies might act as a drag on financial conditions (i.e. trade and immigration), but other policies like tax reform and fiscal stimulus could boost growth. If the economy improves and demand picks up, you’ll see higher interest rates. “It’s true at the longer end and it’s true at the short end.”  And that will be turbo-charged because the economy is already near full employment.  

The Bureau of Labor Statistics says the economy generated 178,000 net new jobs in the month of November. That’s in line with economists’ forecasts. The unemployment rate dipped to 4.6%, a nine-year low. That’s because the labor force participation rate fell to 62.7%. The participation rate has been below 63% for about 2 ½ years now and these levels haven’t been seen since the late 1970s. So Janet Yellen is right—there is still some structural slack in the labor market. Participation rates have been falling since 2000. The under-employment rate (“U-6”) fell again to 9.3% and that’s the lowest since April 2008. It’s good to see continued progress with that metric. We got a bit of a surprise with regard to wages. Average hourly earnings rose 2.5% y/y in the month but that’s a deceleration from the recent trend around 2.6-2.8%. These figures can be volatile month-to-month.  Overall, the report confirms the labor market remains pretty tight. Most industries are hiring, with the notable exception of retail, which shed 8,000 positions.  


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