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December Payrolls Suggest the Stock Market Can Rally Back For Now

Employment Situation
Released on 1/6/2012 8:30:00 AM For Dec, 2011
Prior Prior Revised Consensus Consensus Range Actual
Nonfarm Payrolls – M/M change 120,000  100,000  150,000  110,000  to 200,000  200,000 
Unemployment Rate – Level 8.6 % 8.7 % 8.7 % 8.5 % to 8.8 % 8.5 %
Average Hourly Earnings – M/M change -0.1 % 0.0 % 0.2 % 0.1 % to 0.3 % 0.2 %
Av Workweek – All Employees 34.3 hrs 34.3 hrs 34.3 hrs to 34.3 hrs
Average Workweek – level 34.3  34.4 
Private Payrolls – M/M change 140,000  120,000  160,000  130,000  to 210,000  212,000 

Source: Bloomberg

The payroll numbers for December were once again a positive for the economy. Most impressively, the headline employment number came in at an increase of 200,000 – well above the consensus expectation of 150,000. The numbers for November and December were revised down but only by a small 8,000, making little difference to the overall picture of a improving labor market.

Moreover, the job creation was once again all in the private sector, where jobs increased by 212,000 in December, following increases of 120,000 in November and 134,000 in October. 

Elsewhere, the unemployment rate edged down again – to 8.5%. The unemployment rate comes from the household survey, which this month receives new seasonal factors which will affect the numbers going back to 1997. This makes immediate interpretation trickier than usual. Nevertheless, the recent decline in the unemployment rate does support the improvement discussed above in the employment series from the more reliable corporate-based Establishment survey.
As we have mentioned in recent months, the trend in these numbers points to a labor market which, though still anemic, appears to have stabilized and suggests that the economy has managed to avoid the onset of another outright recession. 
There of course continue to be recessionary pressures out of Europe. However, for now these appear to have been largely priced in and it may well be the case that growth in Asia and the US is holding together not badly. Consequently, the balance of risks at present probably suggests that Asian and US growth may well be dulled by a European recession – but not eradicated. The major threat to that assessment is the outlook for the oil price – more on this below.
At time of writing, the US stock market is down on the day. However, whatever the stock market reaction on the day, all of the above tends to suggest that it could very well rally through the first half of January at least. At which point, two global factors will of course be dominant - 
  • The European debt crisis and progress in funding the EU’s coming auction schedule
  • The Iranian situation and the path of the oil price
The situation in Europe continues to be difficult. However, a significant amount of negativity and risk aversion is priced into the market ahead of the upcoming auction schedule. Moreover, though the cost of rolling over the debt for nations such as Italy is likely to be high, there seems to be a reasonable chance that the ECB’s provision of three year funding may help ensure that the refinancing in Europe at least gets done. That may create a degree of relief in the markets.
Little of the risk with regard to the oil price, however, has as yet been priced in. The EU is due to make a decision on sanctions on Iran on January 30th and Iran has scheduled more Navy war games for early February. The risk is somewhat obviously higher oil prices.
We will write more about this in an upcoming article. However, the risks in the region and the potential damage that higher oil prices could do to global growth once again simply highlight the need for an energy policy with the potential to break the dependence of the US economy on foreign oil. You can read more about this in our recent interview with ex-CIA Chief Jim Woolsey here.
From a trading perspective, it seems worthwhile running long stock market positions into the second half of the month. From that point onwards, however, it would seem worthwhile exercising a large degree of caution.
Disclosure: I am long the US stock market via a range of individual stock positions.