NFP React: Stocks rise on strong jobs report and slowing wage pressures, ISM Services contract, oil rises, gold higher as Fed hiking job almost done, crypto pares losses

US stocks initially rallied after the NFP report showed the labor market remains strong and as wage price spiral risks are easing. The Fed will stay on their tightening course but risks of more hikes in the Spring are easing as optimism is growing that wage pressures will continue to drop.

Stocks are getting a boost here as Fed rate hike bets get slashed, but earnings risks should keep the gains somewhat limited.  The focus will shift to next week’s inflation report and traders should not be surprised if inflation falls even further than expected. 

The initial NFP driven stock market rally was faded but it quickly got its mojo back after the ISM service index fell into contraction territory for the first time since May 2020. The December ISM Services report was very weak and supports the idea that service part of the economy is finally breaking.

NFP

The labor market continues to impress.  Wall Street is liking this NFP report as hiring continues, the labor force is growing, and wage pressures are coming down. The Fed will take this NFP report as the unemployment rate fell, but lower wage growth appears to be happening. Ideally they’d be happy if wages eased further and the unemployment did not surge, but that probably won’t happen throughout the rest of the year. This economy is still recession bound and the unemployment rate should start to rise fairly soon.

The details

The US economy added 223,000 jobs in December, close to the estimate of 203,000. The November reading was revised down from 263,000 to 256,000.  The economy is still adding jobs, but this is the weakest pace since December 2020.  All the average hourly earnings data points came in softer than expected.  The year-over-year average hourly earnings increase of 4.6%, was much lower than the 5.0% estimate and the downwardly revised prior reading of 4.8%.  The unemployment rate is at 3.5%, returning to the lowest levels seen since the 1960s. 

Oil

This was a very good NFP report for oil as the labor market remains robust and wage pressures are coming down which will allow the Fed to stop hiking fairly soon. For oil to keep this rally going, energy traders need to see China showing progress with their current COVID outbreak.

Crude’s upcoming week is filled with the US inflation report, China releases both CPI and trade data, and the EIA releases their short-term crude outlook.  The primary focus however remains on China as energy traders will keep a close eye on their handling of this Covid surge.  Since the Saudis are already slashing prices, we could hear a steady chorus of demand destruction concerns if China’s Covid situation worsens. Earnings season begins on Friday and that could be huge if the banks turn very pessimistic about the economy and the US consumer. 

Gold

Gold got a boost after a solid NFP report with cooling wages supported the idea that the Fed is almost done with raising rates.  Yields initially tumbled but pared losses as we still need to see a couple more inflation reports confirm that disinflation trends are strongly entrenched. The ISM Services index confirms that the US economy is showing further signs of weakening as the service sector shrinks, which should support the case for holding gold.

Crypto

Bitcoin pared losses after a solid NFP report showed healthy job gains and cooling wage pressures.  Bitcoin’s bounce post-NFP was limited as buyers remain concerned with FTX contagion risks.  The headlines that dominated crypto focused on Silvergate, Riot, crypto layoffs, and as FTX saga continues.  

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