Wall Street Breakfast: State Of The Labor Market

Dec. 02, 2022 7:15 AM ET45 Comments
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State of the labor market

The release of November's non-farms payroll report at 8:30 a.m. ET is expected to show that jobs growth is continuing to slow as the Fed's aggressive rate hike path starts to rein in consumer and business spending. Economists expect 200K jobs will be added during the month, down from 261K in October, while the unemployment rate is expected to stay at 3.7%, near a 50-year low. Some other recent economic reports back up the expectation for a slower increase in jobs - the ADP November report, October JOLTS, and an increased number of firing announcements.

Quote: "As high-profile layoffs surge through the U.S. tech industry, the broader private sector is still creating jobs, but at a slower pace, while job openings are still high," said José Torres, senior economist at Interactive Brokers. "These factors imply that the Federal Reserve's tightening campaign is helping to slow the economy and inflation, but the challenging war against increasing prices is far from over."

Indeed, traders don't see the Fed pivoting anytime soon, though, as Fed officials have been indicating, they're betting on smaller rate hikes going forward. The CME FedWatch Tool puts a 75.8% probability on a 50 basis point increase at the Dec. 13-14 Fed meeting, down from the 75 bps hikes at each of the past four meetings. For the February meeting, traders see a 48.2% probability of a 25-bp hike and put the odds of a 50-bp hike at 43.0%.

Inflation watch: Workers' average hourly earnings are expected to increase 4.6% Y/Y, easing from the 4.7% increase in October, both below current inflation rates. Core PCE, a key gauge the Fed watches, rose 5.0% Y/Y in October, in the most recent inflation report, still more than double the central bank's 2% target. As inflationary pressures from supply bottlenecks and commodity prices ease, "wage increases are probably going to be a very important part of the story going forward," Fed Chair Jay Powell said Wednesday. "Of course, we want wages to go up, but they have to be consistent with the goal of 2% inflation." (7 comments)

Rail strike avoided

The Senate has passed a bill by an 80 to 15 margin that will avert a rail strike, only a day after it passed in the House. The measure now goes to the desk of President Biden, who had urged Congress to act quickly before a Dec. 9 strike deadline. The legislation enacts a new contract that provides railroad workers with a 24% increase in wages from 2020 through 2024, immediate payouts averaging $11,000 upon ratification, as well as an additional paid day off on top of existing vacation time.

Snapshot: By some estimates, the railroads impact about a third to about 45% of all freight in the U.S., meaning a strike could trigger knock-on effects for many industries and become another inflationary threat. It would also likely cost the nation $2B in economic output per day if things went off the rails. To prepare for a shutdown, railroads even stop accepting security-sensitive shipments, such as chemicals to treat drinking water.

A separate vote on adding seven days of paid sick leave to the agreement failed in the Senate, which had been one of the main sticking points during negotiations between the railroads and unions. Arguments against stated that congressional modifications to the contract would set a dangerous precedent, though others felt that it should finally be a standard practice for the sector. "I have long been a supporter of paid sick leave for workers in all industries - not just the rail industry - and my fight for that critical benefit continues," President Biden declared, though it's unclear what actions he might take on the contentious issue.

Related Tickers: Canadian Pacific Railway (CP), Canadian National Railway (CNI), CSX Corp. (CSX), Union Pacific (UNP), Berkshire Hathaway (BRK.A, BRK.B) and Norfolk Southern (NSC). (43 comments)

B-21 Raider

It's a bird, it's a plane... Wait! Where did it go? The U.S. Air Force today will unveil the most advanced aircraft on the planet and its first stealth bomber in over three decades. The B-21 Raider, built by Northrop Grumman (NYSE:NOC), has been in development since 2015 after the defense giant won a contract to design and produce the plane. Currently, six bombers are being built in Palmdale, California, at cost of around $2 billion per aircraft, which are expected to begin flying in 2023.

What we know so far: The Air Force has called the B-21 a sixth-generation aircraft, meaning it would likely surpass the flying technology of its newest combat fighter, the F-35, which entered service in 2015. It's set to replace the aging B-1 and B-2 bomber (also designed by Northrop), to become the "backbone" of the U.S. Air Force bomber fleet. The Raider will also be significantly cheaper to maintain, requiring less money, maintenance and resources to keep it airworthy.

Investors will get more details later today, but the plane is expected to be dual-capable, meaning it can launch nuclear or conventional bombs and missiles. "Open architecture" will allow for easier and quicker upgrades, in addition to new stealth features and materials. Reports also suggest that it has the potential to fly autonomously without a crew, and can transmit and share vast amounts of data to make it a strategic offensive or defensive weapon.

Fun fact: The B-21 Raider is named in honor of the Doolittle Raid in 1942, when 80 airmen, led by Lt. Col. James "Jimmy" Doolittle, and 16 B-25 Mitchell medium bombers set off on a mission that changed the course of World War II. The actions of the 80 volunteers were instrumental in shifting momentum in the Pacific theater, with the raid being marked as a catalyst for future progress in U.S. air superiority from the land or the sea.

Softening stance

A lot has happened since protests erupted across China last week in response to zero-COVID policies. A relief rally took hold on Tuesday after a Chinese State Council press conference signaled that further changes to current measures might be in the making, while top leaders continue to signal a more pragmatic approach. "With the decreasing toxicity of the Omicron variant, the increasing vaccination rate and the accumulating experience of outbreak control and prevention, China's pandemic containment faces a new stage and mission," Vice Premier Sun Chunlan told the National Health Commission.

Policy watch: A landmark shift has already begun in Beijing, which will permit low-risk people with COVID to isolate at home for a week if they desire. The new stance will start in the Chaoyang district, which contains the city's growing central business district and many foreign embassies, and is likely to serve as a model for other areas. A previous approach mandated that COVID positive individuals be sent to government quarantine sites - regardless of severity - to stop community transmission as soon as it was detected.

Earlier this week, health authorities released a plan to boost elderly vaccination, while closely watching the virus as "it evolves and mutates." Officials also relaxed lockdown measures in the northeastern city of Jinzhou and the southern hub of Guangzhou, as well as Xinjiang's capital of Urumqi. The city was the site of a deadly fire that killed 10 people, and first triggered the nationwide protests featuring blank sheets of white paper that were raised as a symbol of defiance.

Commentary: Recent developments are "not a sign that China is ready to transition to living with COVID, but a sign that the virus has slipped out of control and that the government is unable to return to a zero-COVID environment," said Nicholas Thomas, Associate Professor at the City University of Hong Kong.

Today's Markets

In Asia, Japan -1.6%. Hong Kong -0.3%. China -0.3%. India -0.7%.
In Europe, at midday, London -0.2%. Paris -0.2%. Frankfurt +0.2%.
Futures at 6:30, Dow flat. S&P flat. Nasdaq flat. Crude +0.1% to $81.30. Gold -0.1% to $1813.90. Bitcoin -0.5% to $16,985.
Ten-year Treasury Yield -1 bps to 3.52%

Today's Economic Calendar

Auto Sales
8:30 Non-farm payrolls
9:15 Fed's Barkin: “Is a Labor Challenge Coming”
10:15 Fed's Evans: “The Role & Effectiveness of Financial Regulation”
1:00 PM Fed's Evans Speech
1:00 PM Baker-Hughes Rig Count

Companies reporting earnings today »

What else is happening...

Supreme Court to hear case on Biden's student loan forgiveness plan.

Details scarce as Tesla (TSLA) delivers first electric semi to Pepsi (PEP).

Coinbase (COIN) forced by Apple (AAPL) to stop NFT transfers.

Blackstone (BX) to sell stakes in MGM Grand, Mandalay Bay hotels.

To-go orders: McDonald's (MCD) tests new smaller restaurant concept.

Ulta Beauty (ULTA) boosted by big profit beat, raised forecast.

Crude scores fourth straight gain as EU nears $60 price cap.

Fed's Michael Barr signals stricter capital rules for big banks.

Twitter suspends Kanye again; Ye terminates Parler merger.

Inflation starts to ease as expected in October, with 6% Y/Y PCE print.

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