Stocks surge after better-than-expected jobs report

The December jobs report suggests that the economy is still in decent shape. Employers added more jobs than expected and the unemployment rate is back near a half-century low. Wages are growing, albeit not as rapidly as they were a few months ago. But another economic report that came out Friday morning paints a slightly different picture.

The Institute for Supply Management's (ISM) Services Index, a key measure of economic activity outside of the manufacturing sector, was much lower than what economists were expecting and could be another indicator that the economy is heading into a recession.

The ISM Services reading came in at 49.6% for December...well below November's 56.5% level and forecasts for about 55%. But what's most alarming is the fact that the number dipped below 50%. That is a sign of contraction. The last time the index was this low was during the brief Covid-induced recession in May 2020.

ISM added that its new orders index, another sign of future economic activity, also fell below 50% for the first time since May 2020.

The jobs market might finally start to show some signs of weakness in the coming months as well.

"Employment contracted due to a combination of decreased hiring due to economic uncertainty and an inability to backfill open positions," said Anthony Nieves, chair of the ISM services business survey committee, in the report.

At first glance, investors saw this morning's December jobs report as something to celebrate. The Dow shot up about 300 points in early trading as the last report of the year showed that wage growth had eased.

It didn't last long, though.

That's because the data was mixed: Wage increases are slowing, but unemployment fell to historic lows. This indicates the Fed may remain on its hawkish policy path of aggressive interest rate hikes.

Investors appear to be befuddled as they dig deeper into the report. The Dow and S&P 500 have cut their earlier gains and the Nasdaq briefly tipped into negative territory.

"This report should add to investor confusion and heighten market volatility in the weeks ahead," wrote John Lynch, chief investment officer for Comerica Wealth Management in a note. "It also complicates the Fed’s battle against inflation...A 50-basis-point move is back on the table for the next FOMC meeting in a few weeks."

Andrew Patterson, senior economist at Vanguard echoed the confusing nature of the report: "A mixed report with strong headline payroll numbers but falling wages. Not much in the way of firm evidence for the Fed to base their 25 v 50 bps decision at the next meeting on," he wrote.

Given the befuddling report, Patterson said, he expects more focus and importance will be placed on next Thursday's CPI inflation report.  

President Joe Biden reacted to the better-than-expected December jobs report Friday, calling the job growth “great news” and “more evidence that my economic plan is working” as he reiterated that there is still more work to be done on inflation. 

“Today’s report is great news for our economy and more evidence that my economic plan is working. The unemployment rate is the lowest in 50 years. We have just finished the two strongest years of job growth in history. And we are seeing a transition to steady and stable growth that I have been talking about for months,” Biden said in a statement. 

He pointed to the slowing in job creation as “appropriate.”

“At the same time, average monthly job gains have come down from over 600,000 a month at the end of last year to closer to 200,000 a month. This moderation in job growth is appropriate, and we should expect it to continue in the months ahead, even as we maintain resilience in our labor market recovery,” he said. 

But, Biden added, “We have more work to do, and we may face setbacks along the way, but it is clear that my economic strategy of growing the economy from the bottom up and middle out is working. And we are just getting started.”

Cue the theme song from "Curb Your Enthusiasm." One market strategist thinks investors are WAY too excited about the December jobs report.

Principal Asset Management chief global strategist Seema Shah thinks that even though "expectations for a soft landing in the economy have likely been boosted in light of today’s jobs report," that is probably the wrong take.

Shah argued in a report that "with the unemployment rate back to the historic low of 3.5%, how realistic is it to expect wage growth to move meaningfully lower?"

In other words, labor conditions are still tight and companies are going to have to keep paying more in compensation to attract talent.

With that in mind, she thinks the Fed "will likely be skeptical" and "that there is still so much work ahead of them." Shah said that short-term interest rates, currently in a range of 4.25% to 4.5%, "are set to rise above 5% within just a few months."

The takeaway? Shah wrote that "a hard landing looks to be the most likely outcome this year. The recession clock is ticking."

Jobs may be the phrase of the week, but the word of the year is still "recession."

In the current economy-driven market, the question of whether a soft-landing is still possible is at the top of every investors' mind.

Today's jobs report may have assuaged some of those fears: Employment remained strong while wage growth eased -- a potential Goldilocks situation for a Fed that's looking to avoid an inflation-driving wage-price spiral without crashing the economy.

But Morning Consult's chief economist John Leer isn't convinced that a soft-landing is in the cards.

"Job growth remains strong, but it’s clearly slowing. Highly publicized layoffs in the tech sector have not affected the broader economy given how many job openings still exist, and higher interest rates have yet to meaningfully affect the demand for workers," he wrote in a note Friday morning.

The takeaway: "As those higher borrowing costs constrain business investment during the first half of this year, hiring will also pull back," wrote Leer. "We should enjoy this period of relative economic stability while it lasts."

US stocks opened higher on Friday after the December jobs report showed wages grew more slowly than expected last month — indicating that the Federal Reserve may be gaining ground in its efforts to tame inflation.

Bad news continues to be good news for investors: Signs of a weakening US labor market are buoying stocks and decreasing fears that strong labor data would continue to drive hawkish Fed monetary policy.

Wages grew by 0.3% in December, according to the government's nonfarm payrolls report, falling short of economists’ expectations of 0.4% and down from November’s 0.6%. 

Yet the US economy added 223,000 jobs last month, higher than the expected 200,000 jobs. The unemployment rate also moved back down to the historic low of 3.5%, from 3.7% in November. 

Today’s stock rebound comes after the Dow fell more than 300 points on Thursday, following the release of stronger-than-expected ADP private payrolls data.

The report showed employers added 235,000 jobs in December, above analyst estimates. Wages also grew faster than estimates. Government data also showed that weekly jobless claims came in below expectations, dealing another blow to investors hoping for a less hawkish Fed. 

The Dow was up 248 points, or 0.8%, on Friday.

The S&P 500 gained 0.7%. 

The Nasdaq Composite was 0.5% higher.

Wall Street seems set to cheer the December jobs numbers.

Stock market futures, which were flat before the jobs report came out, moved solidly higher after the US government reported that 223,000 jobs were added last month...more than expected. The unemployment rate also dipped, to 3.5%.

Dow futures were up more than 100 points, or 0.3%. The S&P 500 and Nasdaq also picked up steam in premarket action following the jobs release. The main reason for the optimism? The pace of wage growth slowed, with worker pay rising 4.6% over the past 12 months. Wall Street was expecting wage growth of 5%.

Wages are a key driver of inflation. So the market is betting that the latest numbers could give the Federal Reserve more reasons to pull back on its pace of interest rate hikes...and potentially even stop raising rates later this year.

The US economy added 223,000 jobs in December, according to the monthly employment report from the Bureau of Labor Statistics, capping a year of extraordinary job growth and marking the second-best year in history for the labor market.

The unemployment rate dropped to 3.5% from a revised 3.6% in November.

Tesla's stock plunged more than 65% in 2022 and this year is off to another less-than-electrifying start for investors in Elon Musk's car giant.

Shares of Tesla (TSLA) were down 7% in premarket trading Friday following the news that the company was cutting prices on many of its models in China for the second time in the past few months.

The price cuts seem to be an acknowledgment that Tesla is concerned about softening demand in the world's most populous nation. As my colleague Laura He notes, China's economy is slowing...and Tesla also faces stiff competition from Chinese electric car companies such as Nio, Xpeng and Warren Buffett/Berkshire Hathaway-backed BYD.

Tesla investors got more shockingly bad news earlier this week when the company reported weaker-than-expected deliveries figures for the fourth quarter.

The tough times for Tesla may not end anytime soon. Competition in the US is heating up too. The stock has already plummeted more than 10% so far in 2023.

And if all that weren't enough, some Tesla shareholders and analysts are growing increasingly nervous about Musk being distracted (even more than usual) as he attempts to resuscitate Twitter following his $44 billion purchase of the social media company.

Musk's focus on Twitter could be one reason why Tesla's top Chinese executive, Tom Zhu, has reportedly been given more oversight of Tesla operations in North America.