The Labor Department will provide a key piece to the increasingly complicated job market puzzle Friday when it publishes the hotly-anticipated November payroll report at 8:30am ET, but it's unlikely to fill out what has become a confounding issue on Wall Street.
Bond markets are acting in a way that suggests both a serious near-term recession risk by bidding-up benchmark 10-year Treasury bonds, pushing their overall yield to multi-month lows, while at the same time keeping short-term rates elevated amid Federal Reserve vows to maintain its fight against inflation.
That competing dynamic has widened the gap between 2-year and 10-year notes to around 45 basis points, up from around 17 basis points when the bond market began its historic rally, one of the strongest since the global financial crisis, in late October.
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The widening gap typically occurs as the bond market looks past recession risk, which it has been pricing in for at least the last eighteen months, and begins to assess the kind of economic recovery that will follow it.
At present, however, the bizarrely resilient job market is making that task increasingly difficult, and as such relying on Treasury trading signals becomes correspondingly risky.
The number of Americans filing for new unemployment benefits nudged only marginally higher last week, Labor Department data indicated Thursday, while the more-reliable four week average was essentially unchanged at 220,750.
Continuing claims, a good indicator of how long it takes the average worker to find a new role, fell by around 64,000 to 1.861 million after hitting a two-year high earlier in the month.
"The sustained increase in continuing claims looks like a warning sign of emerging labor market stress, as people who have lost their jobs are taking much longer to find new ones," said Ian Shepherdson of Pantheon Macroeconomics.
"The rising proportion of people who think that jobs are becoming harder to get, according to the Conference Board’s consumer confidence survey, tells the same story," he added.
Data from Challenger Gray, meanwhile, showed that layoffs over the month of November rose by around 24% from the previous month to just over 45,500, but were 41% lower than the number of cuts unveiled over the same month last year.
“The job market is loosening, and employers are not as quick to hire," said Challenger Gray's senior vice president Andrew Challenger. "The labor market appears to be stabilizing with a more normal churn, though we expect to continue to see layoffs going into the New Year.”
That forecast, however, has proven difficult to maintain this fall, with monthly labor market reports largely topping Street forecasts as companies, many of which warned investors over fading consumer spending prospects, still continue to hire.
Economists expect November's non-farm payroll report, due Friday at 8:30 am eastern time, to show a new gain of 180,000 new jobs, up from the 150,000 tally recorded in October but down from the five-month average of around 213,000.
Goldilocks lurking
That's the kind of 'goldilocks' decline that investors, and the Fed, are hoping for if the economy is to glide into a so-called 'soft landing', where inflation is tamed while recession is avoided.
Wage growth will play a huge part in the equation, and November gains are forecast to moderately only slightly, with a month-on-month advance of 0.3% and an annual gain of 4.0%, according to Wall Street forecasts.
Earlier this week, data from payroll processing group ADP showed that wage gains for those leaving their jobs for a different eased to 8.3%, the slowest since June of 2021, as the economy added a much fewer-than-expected 103,000 new hires over the month of November.
That reflects, to some degree, the big decline in open positions reported by the Bureau of Labor Statistics JOLTS report on Tuesday, with the headline tally slumping to a two-and-a-half year low of 8.733 million.
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"With slower turnover in the job market, workers who have taken on new jobs are more experienced and more effective, which is fueling productivity," said Bill Adams, Chief Economist for Comerica Bank in Dallas.
"Higher productivity means that while businesses are paying more in wages, they’re also getting more output per hour, which reduces the wage-price pressures in business cost structures and takes the edge off economy-wide inflationary pressure," he added.
A more productive workforce, of course, can help companies improve profit margins and, by extension, compel them to hold off on job reductions as a way of cutting costs.
Productivity and profits
That could be why headline tallies are triggering big moves in the bond market, most of which are bearish, while stocks continue to add to their solid end-of-year rally.
Similar data on Friday showing in-line job gains with moderating wage growth could further cement that case.
"If the labor market, consumer spending and corporate spending 'bend but don't break' amid the economic slowdown in the early months of 2024," argues Yung-Yu Ma, chief investment officer at BMO Wealth Management, we'll get the soft landing we're looking for.
But should any or all of those prove to be more resilient, the upside scenario will quickly take shape.
"As 2024 progresses, however, we believe that equity markets will respond positively to the approaching Fed rate cuts and the economic stabilization and upturn that we expect by the spring or summer months," he said.
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