Strong Labor Market Sends Shockwaves Through Stocks and Bonds
Weekly Economic Review: January 10, 2025
Blowout new jobs and a lower-than-expected unemployment rate, indicating a strong labor market and economy, lead stocks to tank and bonds to sell off
The stock market tumbled, and bonds sold off last week, due to concerns about inflation and lower expectations for rate cuts. All this was thanks to the release of three market-moving economic data points: job openings and the ISM Services Index on Tuesday, and job creation and the employment situation on Friday.
Job openings in November came in higher than expected, and the highest since May 2024. Hiring declined in November, while layoffs increased slightly. Workers who voluntarily quit their jobs decreased to the lowest level since June 2020, indicating reduced confidence in their ability to find new employment.
According to the Institute of Supply Management (ISM), the service sector continued to expand in December for the sixth consecutive month, primarily driven by robust business activity, supplier deliveries, and new orders, which resulted in a significant increase in prices paid for materials and services. The increased business activity and new orders indicated solid economic growth in December.
Businesses added the most jobs since March 2024, which came in much higher than the market forecast. The unemployment rate unexpectedly fell, while monthly average hourly wages rose in line with expectations. Job creation for 2024 was lower than that of 2023 but higher than the jobs created in pre-pandemic 2019. Fewer workers involuntarily lost their jobs, while more workers voluntarily left their jobs.
Let’s examine in more detail the Job Openings and Labor Turnover (JOLTS), the ISM service sec-tor index, and job creation and employment situation that were announced last week.
JOLTS: The Bureau of Labor Statistics (BLS) announced that the number of job openings increased by 259,000 in November, to 8.10 million from an upwardly revised 7.84 million (originally 7.74 million) in October. This was higher than the market expectation of 7.74 million, although down by 833,000 from a year ago. The monthly increase was mainly driven by gains in professional and business services (273,000) and finance and insurance (105,000), partially offset by decreases in food services and accommodation (102,000) and information (89,000). At 194,000, the South continued to see significant growth in job openings after rocketing to 486,000 in October as it recovered from the recent severe hurricanes. Job vacancies in the West and Northwest also rose by 32,000 and 49,000, respectively, while the Midwest declined by 16,000.
The ratio of openings to unemployed people remained unchanged at 1.1. The number of hires de-creased by 125,000 to 5.27 million in November, lower than October’s hires, which declined by 188,000 to 5.39 million. The decrease in November hires was mainly driven by manufacturing and professional and business services. Except for the South, all four regions posted small increases in hires for November, while the South declined by 193,000.
Layoffs increased slightly in November, rising 17,000 to 1.77 million after declining by 54,000 to 1.75 million (revised up from 1.63 million) in October. Layoffs were up by 219,000 over the year. The increase in layoffs was centered in leisure and hospitality. All regions except the South posted increases in layoffs, while layoffs in the South declined by 103,000.
The number of people who voluntarily resigned decreased by 218,000 to 3.07 million in November after advancing by 185,000 in October to 3.28 million (revised down from 3.32 million). The quits rate, the rate at which workers voluntarily leave their jobs, excluding retirements, declined to 1.9% in December from 2.1% in October. This indicates that workers are less confident in their ability to find a new job than they were in the past.
ISM Report On Business Services Sectors: The ISM announced December’s economic activities for the service sectors, which account for 70% of the private economy in terms of both employment and GDP. The ISM services index, measuring the economic health of the service sector, came in at 54.1, which was 2.0 points higher than November’s reading of 52.1. An index reading above 50 indicates growth in the services sec-tor. The December figure was also higher than the market expectation.
The ISM’s business activity index (similar to factory production) increased 4.5 points to 58.2 in November from 53.7 the prior month, marking the sixth consecutive month of expansion. The December increase was partially driven by preparation for demand in the new year and potential tariffs under the incoming Trump administration. The new orders index, a forward-looking measure, increased by 0.5 points to 54.2 from 53.7 in November, which was in line with the market expectation. The employment index slightly declined by 0.1 to 51.4 from 51.5 in the prior month, remaining in expansion territory for the fifth time in six months and meeting expectations. The supplier deliveries index registered 51.5, 2 points higher than November’s reading of 49.5, rebounding to expansion territory. Furthermore, the prices index came in at 64.4, a 6.2 point increase from November’s reading of 58.2, higher than the market expectation of 57.5 and the first time the index has registered over 60 since January.
Job Creation and Employment Situation:, The BLS announced that businesses created 256,000 new jobs in December, after advancing 212,000 (revised down from 227,000) in November. The December figure came in significantly higher than the expected 165,000 gain, primarily driven by gains in health care (46,000), leisure and hospitality (43,000), retail trade (43,000), and government (33,000). Additionally, the job creation number for October was revised up again by 7,000 from 36,000 to 43,000 (the October number was abnormally low due to the impact of hurricanes on job creation in the South. As a result, the three-month average of monthly job growth, which smooths out monthly volatility, was 170,333, a slight increase from 170,000 in November. Payroll employment increased by 2.2 million in 2024 with an average monthly gain of 186,000. This is lower than the increase of 3.0 million in 2023, an average monthly gain of 251,000, but higher than the increase of 2.0 million in pre-pandemic 2019 with an average monthly gain of 166,000.
The unemployment rate declined to 4.1% in December, lower than both November’s 4.2% figure and the market’s 4.2% expectation. The number of job losers (or layoffs) was 3.25 million, a significant 143,000 reduction from the prior month. The decline was mainly driven by a decrease of 218,000 in permanent layoffs, partially offset by an increase of 75,000 in temporary layoffs. Furthermore, job leavers, defined by the BLS as unemployed people who voluntarily quit their jobs and immediately start looking for new employment, increased by 93,000 to 947,000 in December, after advancing 52,000 to 854,000 in November. Temporary help services employment, a leading indicator of the labor market trend, was 2.66 million in December. This has been trending upward for the last three months but is lower than the pre-pandemic level of 2.9 million.
The labor-force participation rate (the percentage of working-age people who are employed or are actively looking for work) was 62.5%, the same as the prior month and the market expectation of 62.5%. The rate has been in a tight range of 62.5% to 62.7% since December 2023. The number of people working part-time for economic reasons, representing individuals who would have preferred full-time employment but were working part-time because their hours had been reduced or they were unable to find full-time jobs, decreased by 111,000 to 4.36 million in December following a decline of 96,000 in November. Wage growth (average hourly earnings) rose 0.3% in December after advancing 0.4% in November, coming in as expected. On an annual basis, wages increased by 3.9%, lower than 4.0% in November and the market’s 4.0% expectation.
On a concluding note, due to the blowout new payroll number and robust job openings and service sector, the market is now pricing in only one 0.25% rate cut this year, most likely in the third quarter. Unlike last week, there is no longer any expectation of an additional 0.25% rate cut for this year.
The Treasury yield curve steepened twice last week. The higher-than-expected JOLT and ISM Services Index on Tuesday caused a slight rise in long-term yields. Friday’s blowout jobs report significantly increased middle and longer-term yields in the 2- to 30-year maturities. The two, five, and ten-year Treasury yields ended at 4.40%, 4.59%, and 4.77%, respectively, rising by 12, 18, and 17 basis points compared to their levels a week ago.
The very short end of the yield curve from 3 months to 1 year remained virtually unchanged and inverted with one rate cut expectation. On the other hand, the rest of the middle and long-term part of the yield curve from 2 to 30 years moved up significantly and positively sloped. This yield curve steepening, due to long-term rates rising faster than short-term rates, is called a bear steepener. This is typically associated with investors’ expectation of inflation and rate hikes by the Fed, as higher yields drive bond prices lower, while equity share prices decline due to higher discount rates and borrowing costs.
Looking ahead, the Consumer Price Index (CPI) report is scheduled for release on Wednesday, which will show whether the recent trend of higher-than-expected inflation extended into December. The market expects a monthly headline CPI of 0.3% and an annual headline CPI of 2.9%.
Mark Yoon, CFA CPA
EVP & CFO of Commercial Bank of California
Thomas McCullough
EVP of Commercial Bank of California
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