A LITTLE HELP FROM THE JOB MARKET
The major stock market averages opened modestly higher today following the monthly jobs report (see below). The Dow is currently up 148 pts and the SPX is up .4%. The energy sector is up nearly 2% on continued gains in oil prices. Transports, banks, and semiconductors are also in the green. On the other hand, retailers, gold miners and utilities are down in early trading. Commodities are moving higher as well. WTI crude oil is back up around $55/barrel. Copper is up .3% and iron is up more than 3%. Bonds are falling back, giving up yesterday’s gains. The 5-year and 10-year Treasury yields are hovering around 2.51% and 2.69%. By the way, Treasury yields have been hovering around 1-year lows this month, a condition that usually reflects a softening economic outlook and a more dovish Federal Reserve. But on days when we get some encouraging economic news—like today’s jobs report—yields tend to jump.
December’s Employment Situation Report blew away economists’ forecast with 304,000 net new jobs created. There were some revisions to the prior two months, but the 3-month average payrolls tally is still very close to 200,000. This is good news and shows that the trade war hasn’t caused employers to pause hiring. As a side note, all those affected by the government shutdown were assumed to be gainfully employed because the shutdown was temporary. Average hourly earnings (i.e. wage growth) ticked up to 3.2% from year-ago levels, as expected. Wage growth is slowly accelerating. The unemployment rate ticked up to 4.0% (historically very low) and the under-employment rate rose to 8.1%. Apparently some government contractors were forced to find part-time work during the shutdown. The labor force participation rate rose to 63.2%--the highest level since 2013. The number of discouraged job-seekers and the structurally unemployed has plunged over the last year.
According to the Labor Department’s Employment Cost Index, US wages grew at a 3.1% year-over-year pace during the fourth quarter of 2018. That’s the highest rate in over 10 years. That means that real wages—adjusted for inflation—are rising at a 1.1% pace. Of course, this isn’t a terribly high rate, but it does reflect the fact that the labor market is very strong and it’s really hard to argue that wages aren’t rising.
New home sales surged in November to an annualized rate of 657,000 transactions. Economists were expecting to see almost no improvement from October’s 562,000 rate. The data release is obviously late due to the government shutdown, and stale data is not all that useful. In addition, the big jump in sales was partly due to rebuilding activity in the South after twin hurricanes in the fall. But that’s all we have at the moment. Economists are saying the strength will be short-lived and that homes sales will be lower this year. By the way, the median new home price is down something like 11% from year-ago levels. This is good news since we need to restore some semblance of affordability to the market.
The Trump Administration is proposing new rules to eliminate “backchannel” contracts between drug makers and pharmacy benefit managers (PBMs). It is well known that there are non-disclosed rebates to PBMs on pharmaceuticals at the wholesale level and the government will push to get that cost reduction pushed to consumers. Until now, federal safe-harbor rules have protected drug-makers and PBMs from anti-kickback laws. Of course, the issue and its resolution isn’t nearly as simple as I make it sound. If anything in this society is over-complicated, it’s our health system. According to Bloomberg, “Under the proposal, premiums for Medicare drug plans could increase anywhere from 8% to 22% while average costs patients pay out of pocket would fall 9% to 14%. The premium increases would be shouldered by all beneficiaries while the cost decreases would be most helpful for those who take the priciest drugs.” So there you go: Medicare premiums would rise.
Fourth quarter earnings season is showing that growth is decelerating somewhat. And fewer companies are beating Wall Street projections compared with recent quarters. So far with 220 of the S&P 500 companies having reported, aggregate revenue growth is tracking to 6% and earnings growth is about 13%. But after suffering a 20% drop in the stock market late last year, the slow-down is not news and so far earnings results are good enough to keep the stock recovery on track.