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December rally on Wall Street stalls in face of conflicting jobs reports

The “Santa Claus” rally began after comments by the Federal Reserve suggesting interest rate hikes could moderate soon, but the steam dissipated somewhat after conflicting jobs data show the economy may remain overheated.

MANHATTAN (CN) — Wall Street looked primed for a big rally this week after the chair of the Federal Reserve hinted that slower interest rate increases could be coming later this month, but two jobs reports at odds with each other tempered the enthusiasm by Friday.

By the closing bell on Friday, the Dow Jones Industrial Average gained just 81 points for the week, with the S&P 500 and Nasdaq increasing 45 points and 235 points, respectively.

On Friday, investors were happy to learn the U.S. economy gained 263,000 nonfarm jobs last month, much better than the 200,000 jobs expected by analysts and even slightly better than the 261,000 gained in October. The previous two months’ jobs report were revised downward, however, by 23,000 jobs.

Nearly all the gains were in the private sector, with most of the notable gains in the leisure and hospitality sector, which picked up 88,000 jobs last month. That sector still remains below the prepandemic level by nearly 1 million jobs, as do government jobs, which increased in November by 42,000 but are still missing 461,000 jobs compared with February 2020. Retail fell by 30,000, due to the slowdown in retail sales in the last month.

“The report is a positive development for the economy and helps support the case that the Fed may be able to achieve a soft landing in the economy, an outcome that’s contrary to predictions made by some of the nation’s largest banks in recent months,” said Peter Essele, head of portfolio management at Commonwealth Financial Network. “With the economy continuing the fire on all cylinders, the Santa Claus rally that’s formed may turn into a full bull run in 2023.”

As with many jobs reports in recent weeks, the positive data was a net negative for Wall Street since it indicates the Fed could remain hawkish despite recent comments by Chair Jerome Powell. After the report was released, the Dow fell 300 points, though it recouped some of those losses.

Essele noted the one element of concern in the jobs report is the growth in earnings, which at 5.1% year-over-year also came in above expectations and gives the Fed justification for another 0.75% interest rate hike later this month. Hourly earnings have lagged inflation, which means real wages actually decreased last month.

But real wages should start to pick up as inflation decelerates, and the currently tight labor market nudges nominal wages upward, according to Jeffrey Roach, chief economist at LPL Financial. “Given the tight labor market, firms will likely hoard workers in the coming months despite an economic slowdown,” Roach said.

The jobs report by ADP on Wednesday painted a less rosy picture, noting private sector employment increased only by 127,000 jobs in November and that annual pay was up 7.6%. While mollifying Wall Street’s concerns that the economy remained overheated, the report was a splash of cold water in the face of Main Street, showing that job gains were the slowest since January 2021.

Some of details of ADP’s report were concerning to both, however, as manufacturing lost 100,000 jobs and business services dropped by 77,000 jobs. The biggest gains in the report were in leisure and hospitality, which gained 224,000 jobs; education and health services, which netted 55,000 jobs; and transportation, which saw a 62,000-job increase.

Nela Richardson, the payroll company’s chief economist, said the report shows companies are no longer in “hyper-replacement mode” and steadying their hiring. “Turning points can be hard to capture in the labor market, but our data suggest that Federal Reserve tightening is having an impact on job creation and pay gains,” she said in a statement. “Fewer people are quitting and the post-pandemic recovery is stabilizing,” she said.

The Fed has been softening its language in recent weeks, with Chair Jerome Powell suggesting in a speech to the Brookings Institution earlier in the week the central bank could soon pare back its interest rate hikes. “The time for moderating the pace of rate increases may come as soon as the December meeting,” Powell said, though he cautioned the audience — and investors — that the Fed would “stay the course” to ensure it curbed inflation.

“Given our progress in tightening policy, the timing of that moderation is far less significant than the questions of how much further we will need to raise rates to control inflation, and the length of time it will be necessary to hold policy at a restrictive level,” Powell added. “It is likely that restoring price stability will require holding policy at a restrictive level for some time.”

Markets were more than happy with the remarks, with the Dow closing nearly 800 points higher on Wednesday following the speech, which is Powell’s last before the Fed meets again on December 13 and 14.

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