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The U.S. Week Ahead (Jan 6-10): Jobs Set to Slow as Geopolitical Jitters Grow

By:

Senior Market Analyst at Interactive Brokers

The December employment situation highlights the economic calendar in the week ahead, as global financial markets grapple with heightened geopolitical tensions between the U.S., Iran and the broader Middle East.

Market participants widely expect a slowing of additional nonfarm payrolls (NFP) in Friday’s reading of the U.S. Bureau of Labor Statistics’ (BLS) jobs report, after the surprise spike in November’s numbers.

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Median estimates place NFP for December at around 160k, with some analysts expecting as much as 210k.

Jefferies economists Ward McCarthy and Thomas Simons, for example, think the latest month’s figures could tally 195k, with a 0.3% increase in average hourly earnings (AHE) over the prior month and a 3.1% rise in AHE year-on-year. They also think the unemployment rate will tick lower to 3.4% from 3.5% in November.

McCarthy and Simons added that with “more job openings than unemployed people and the Census Bureau set to hire as many as 500k temporary workers in the first half of the year, 2020 will be another good year for the labor market.”

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Fewer Cuts

Indeed, by some measures, job cuts fell sharply in December.

According to global outplacement and business and executive coaching firm Challenger, Gray & Christmas, U.S.-based employers slashed the fewest positions at year-end 2019 in roughly a year and a half.

In fact, December marked the second straight month of lower job cuts, with 32,843 positions shed, the lowest monthly total since 27,122 cuts were announced in July 2018. The total was 26.3% lower than the 44,569 cuts announced in November and 25.2% smaller year-on-year.

Andrew Challenger, VP of Challenger, Gray & Christmas, Inc, said that with “some resolutions occurring in the trade war and strong consumer spending in the fourth quarter, companies appear to be taking a wait-and-see approach.”

Among the industries suffering the largest share of job cuts in 2019, retail led all sectors with

77,475, 21% lower than the prior year, with roughly 69% of that total due to bankruptcies. Meanwhile, industrial goods manufacturers ranked second with 70,894 cuts, 156% higher than in 2018, and the highest total for this sector since 2009, when 125,423 cuts were announced.

Challenger added that the sectors with the highest number of cuts in 2019 were “all dealing with trade concerns, emerging technologies, and shifts in consumer behavior.”

Slide in Manufacturing & Retail

Recent data from the Institute for Supply Management (ISM), as well as the November employment situation report from the BLS, appear to agree with Challenger’s findings.

ISM’s December 2019 Report on Business showed a further deceleration in manufacturing activity (47.2) from November (48.1), and not only marked the fifth consecutive month the reading has fallen below the 50-level – the line that signals the separation of contraction from expansion – but plunged to its lowest point since June 2009.

The gauge also revealed the employment index contracting more rapidly in December, having slowed to 45.1 from 46.6 in November and hitting its lowest level in more than ten years.

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While the BLS reported a surge of 266k NFPs in November, along with a total of 41k upward revisions to the prior two months,  employment in retail trade was about unchanged in the latest month (+2k), as well as in other major industries, including construction and wholesale trade. “Notable” job gains occurred in health care (+45k), as well as in professional and technical services (+31k).

Over the past twelve months, the health care and professional and technical services arenas added 414k and 278k, respectively, while retail lost about 31k.

The headline November jobs number was also largely due to a boost from the return of auto works who had previously been on strike in the previous month.

The Fed Listens

Meanwhile, the Federal Open Market Committee (FOMC) – the policymaking arm of the Federal Reserve – noted in its latest meeting minutes that feedback from participants at its Fed Listens initiative “generally saw the current strong labor market as providing significant benefits to their communities, most notably by creating greater opportunities for individuals who have experienced difficulty finding jobs in the past.”

However, the FOMC added that “these representatives noted that the benefits from current labor market conditions flowing to people in their communities were less than those implied by national statistics, and they expressed concerns that the recent gains might not be sustained in the event of an economic downturn.”

In 2019, the Fed conducted a series of 14 public-facing events across the country, with an aim to engage the public directly on issues related to its dual-mandate objectives of maximum employment and price stability.

In its monetary policy statement for December, in which the FOMC had left its target range for the fed funds rate at 1.50%-1.75%, the committee continued to characterize the labor market as “strong,” with job gains, on average, “solid” in recent months, and with the unemployment rate remaining low.

Flight-to-Safety

Against this backdrop, investors will likely be paying close attention to the BLS report ahead of the weekend, as well as ongoing heightened threats of violence between the U.S. and Iran following the recent assassination of Iranian military commander Qasem Soleimani, who was killed in a U.S. air strike at Baghdad airport.

The incident, coupled with the downbeat ISM manufacturing report for December, has sent financial markets reeling, spurring prices of oil and gold higher, as well as the 10-year U.S. Treasury note, which jumped by around 8-9 basis points Friday.

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Analysts at Janney Montgomery noted that the flight-to-safety trade was “alive and well,” following the exodus by investors out of U.S. Treasuries in December “on the combination of year-end portfolio repositioning and improved sentiment towards risk assets and the economy for 2020.”

Janney added that the “sharp retracement” resulted in the yield on the 10-year U.S. Treasury note falling from 1.94% before the market open on January 2 to 1.76% in overnight trading Monday. Similarly, the 30-year Bond yield dropped from 2.41% early morning on January 2 to 2.22% around the same time in the overnight. “All eyes will be on Iran’s retaliatory measures,” they said.

Yields on the 10-year note and 30-year Bond were last bid at around 1.80% and 2.26%, respectively, while the price of gold was up around 0.75% to 1,564.35 and the cost of crude has risen roughly 0.2% on the day to 63.23.

The economic calendar in the week ahead also includes:

Tuesday, January 7

  • Trade Balance (Nov)
  • ISM Non-Manufacturing PMI (Dec)
  • Factory Orders (Nov)
  • American Petroleum Institute (API) Crude Oil Stocks

Wednesday, January 8

  • ADP Employment Change (Dec)
  • U.S. Energy Information Administration (EIA) Crude Oil Stocks

Thursday, January 9

  • Initial Jobless Claims

Friday, January 10

  • BLS Employment Situation (Dec)

In the meantime, select the Event Calendar option in the IBKR Trader Workstation for a full list of U.S. and global corporate events and earnings, dividend schedules, economic data, IPOs and more.

Disclosure: Interactive Brokers

The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Disclosure: Author Security Holding: No Positions

The author does not hold any positions in the financial instruments referenced in the materials provided.

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