Markets shrugged off a volatile week Friday to close positive, buoyed by a strong jobs report and an easing of uncertainty around the Federal Reserve’s next interest rate decision. For the week, the S&P 500 grew 0.08%, the Dow gained 0.28%, and the NASDAQ added 0.29%.[i]
Stocks surged late last week after a strong November jobs report gave investors renewed confidence in the economy. Data shows that the economy gained 211,000 jobs in November, beating the forecast of 200,000. More importantly, the October report was revised upward, giving us back-to-back months of strong labor market growth.[ii] The unemployment rate remained flat at 5.0%, while wages increased by 2.3% from a year ago.[iii] Digging deeper into the data, we see that jobs were created in multiple sectors of the economy, supporting broad-based growth.[iv] The upbeat report may give the Fed what it needs to go ahead with interest rate increases in the coming months.
Fed chair Janet Yellen also signaled her readiness to raise interest rates in speeches last week. She told Congress that gradual rate hikes are likely to begin in December as long as there are no major shocks that might undermine confidence in the economy. She also warned that waiting too long to raise rates might force the Fed into tightening monetary policy quickly to avoid overheating the economy.[v]
However, the news overseas is not so rosy. Markets slid on Thursday when investors here and abroad reacted badly to the European Central Bank’s new stimulus plans. Investors felt that the ECB’s plans were too little, too late, and they responded by selling.[vi] In China, economic sentiment remains cautious as additional data shows that demand is still weakening and further risks to growth exist.[vii]
Bottom line: The jobs report and other domestic data may give the Fed the boost it needs to raise interest rates at the mid-December Open Market Committee meeting. Weighing on the other side are ongoing concerns about global growth; however, as long as nothing major happens between now and the December meeting, the odds seem to favor an interest rate increase.
Looking at the week ahead, investors will be poring over November retail sales data, consumer sentiment, and inflation reports ahead of the Fed’s meeting on the 15th and 16th. Positive news would likely fuel additional speculation about a December rate hike.[viii]
Right now, markets appear to have a somewhat unhealthy codependence on central banks. As decoupling between the U.S. and the rest of the world continues, we can expect a seesaw of emotions to drive additional volatility. At the moment, a solid jobs report is being viewed favorably by investors because it takes away some of the uncertainty around interest rate hikes. However, sentiment could sour quickly when some other headline changes the odds. On top of the standard end-of-year shuffling of portfolios, we’re expecting the next couple of weeks to be volatile.
Wednesday: EIA Petroleum Status Report
Thursday: Jobless Claims, Import and Export Prices. Treasury Budget
Friday: PPI-FD, Retail Sales, Business Inventories, Consumer Sentiment
Holiday deal-making drives auto sales. Black Friday and early holiday shopping propelled November motor vehicle sales to the biggest month in 14 years.[ix]
Beige book shows economic activity expanding. A Federal Reserve report of anecdotal business activity shows that the economy expanded moderately between October and November.[x]
OPEC votes to maintain production. Even as rig counts are falling under the weight of cheap oil, the important Organization of the Petroleum Exporting Countries (OPEC) organization voted to keep producing high volumes of oil to maintain market share.[xi]
Manufacturing report suggests gloom. A measure of manufacturing activity in the key Chicago area shows that a strong dollar, slowing global growth, and other factors may foretell weakness in the manufacturing sector.[xii]