Stocks surge after better-than-expected jobs report

The monthly jobs report showed that some of the biggest gains were in industries such as leisure and hospitality, health care, and accommodation and food services, which all were hit hard during the pandemic.

There were also notable monthly job losses in technology and interest-rate-sensitive sectors that surged during the pandemic and are now rebalancing as consumers shift spending toward services. 

Industries such as information, finance, retail, transportation, and professional and business services all shed jobs between November and December.

Some of those losses are likely an effect of the waves of mass layoffs hitting the tech industry, said Ken Kim, a senior economist at KPMG.

"We are seeing a little bit of spread to other areas," he told CNN. 

Jobs added by major sector between November and December 2022

Total: +223,000 to 153.7 million

Mining and logging: +4,000 to 644,000

Construction: +28,000 to 7.78 million

Manufacturing: +8,000 to 12.9 million

Wholesale trade: +12,000 to 5.9 million

Retail trade: +9,000 to 15.8 million

Transportation and warehousing: +4,700 to 6.5 million

Utilities: +1,600 to 544,400

Information: -5,000 to 3.1 million

Financial activities: +5,000 to 9 million

Professional and business services: -6,000 to 22.4 million

Education and health services: +78,000 to 24.9 million

Leisure and hospitality: +67,000 to 16.1 million

Government: +3,000 to 22.4 million

Source: Bureau of Labor Statistics

Wall Street's roller coaster ride continued Friday morning, with the three major indexes swinging back into bull mode by late morning after the Dow and S&P 500 opened modestly higher — then gave up nearly all their gains. The tech-heavy Nasdaq had even briefly dipped into negative territory.

Why the rally? Another "bad but good" economic report may have been the catalyst. Stocks moved to their highs of the day after the Institute for Supply Management's services index unexpectedly contracted. That appeared to give investors more hope that the Federal Reserve will slow its pace of rate hikes.

The Dow was up more than 535 points, or 1.6%, in late morning trading Friday.

The S&P 500 gained 1.5%. 

The Nasdaq Composite rose 1.5%.

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.