November saw further improvement in many labor market variables, with some measures—including the lowest unemployment rate since December 2000—pointing to a tightening market. Across the major asset categories, global equities experienced continued positive momentum. Domestic markets produced the most pronounced gains, while a modest increase in Treasury yields led to a slight pullback in many
U.S. Labor Market Tightens Further Through November
The Bureau of Labor Statistics’ November Employment Situation report provided additional evidence of a fairly-tight labor market in the United States. The headline (U-3) unemployment rate, for instance, held steady at 4.1%, matching October 2017 as the lowest rate since December 2000 (3.9%). In addition, nonfarm payrolls surprised to the upside, printing at 228,000 net new jobs during the month in comparison to the conservative Bloomberg median consensus estimate of 195,000. The solid monthly payrolls reading helped send smoothed measures of payrolls growth higher, with an average of 178,000 net new jobs added per month over the trailing six-month period.
Stable jobs growth—which has recently been accelerating—in conjunction with a steadily-improving unemployment rate should help keep near-term recessionary risks at bay. Past recessionary environments were preceded by sub-1% year-over-year payrolls growth, an inverted yield curve, and trend-reversals in the U-3—none of which appear to be an immediate concern. The nonfarm payrolls and unemployment rate graph helps showcase the solid labor market underpinning the ongoing economic expansion.
While the labor market continues to exhibit potential tightness at the headline level, ongoing subdued labor force participation and stubbornly low inflation-adjusted wage growth readings highlight structural strains inherent in the labor market, with the former potentially serving as a key headwind to both elevated inflation and employee wage growth rates. Regardless, with headline unemployment near a 20-year low and payrolls exhibiting persistent strong gains, the Federal Reserve is likely to remain committed to its current monetary policy tightening path. The Fed’s mid-December meeting will be a key focus of the markets, which are fully anticipating a rate hike to
In summary, the U.S. labor market continued to strengthen in November, driven by a stronger-than-expected payrolls print and steady headline unemployment hovering near a 20-year low. While broader participation measures and employee wage growth remained weak compared to historical average levels, market-implied expectations for the future course of Fed monetary policy continue to reflect incrementally tighter monetary conditions over the near term.
1 Bureau of Economic Analysis
2 Bureau of Labor Statistics
U.S. equity returns were strong again in November, driven by continued earnings growth and global economic expansion. Optimism remained high as the Senate and House of Representatives made progress toward a potential tax reform bill, which may provide further support to U.S. equities if earnings growth materializes as a result.
Large, mid, and small cap stocks performed in-line with each other over the month, and value index returns kept pace with growth index returns.
All sector returns were positive in November. Strong returns in the
financialssector were driven by tax plan optimism combined with an anticipated December rate hike,but were isolated to the final few days of the month, while energy rebounded with strongperformance over the month as oil prices continued to rise.
International developed markets out-performed emerging and frontier markets although lagged domestic markets during the month.
Euro zoneeconomic momentum accelerated after a revised GDP growth estimate printed at 2.5%, due in large part to strong German economic growth. November also saw a return of political uncertainty, as turmoil created by the Catalonia referendum in Spain and ambiguity in Germany’s political future tempered returns.
After strong gains year-to-date, emerging market returns were muted in November in the face of headwinds from rising optimism for U.S. tax reform and a broadly strengthening U.S. dollar. South Africa recorded strong gains after speculation that December’s election may prompt a pro-market policy change. In contrast, Chile fell sharply after support for Sebastian Pinera during the first round of the presidential election came in lower than expected.
Markets have shown anticipation that the Federal Reserve will continue to support gradual interest rate hikes and the gradual reduction of its balance sheet, with a 100% probability of a rate hike in December 2017.
In China, authorities have continued to promote growth, but the announcement of additional credit tightening regulations fueled concerns about the target growth rate for 2018. However, emerging market debt continued to show positive performance overall, with Moody’s upgrading Indian government debt in November.
Europe and Japan have sustained quantitative easing programs, though both countries are in the process of tapering their policies.
U.S. bond returns were slightly negative across most sectors amid rising rates, with the notable exception of a slight gain in Treasury Inflation-Protected Securities.
The yield curve flattened slightly as the Treasury announced a future supply weighted more heavily towards shorter-term notes.
Bonds in Europe and Japan gained due to the continuation of quantitative easing programs as
wella 2% rise in the euro and yen against the U.S. dollar.
Strong corporate earnings drove the U.S. REIT market’s positive returns. Additionally, domestic REITs experienced tailwinds from increased shareholder activism in the mall sector. Shareholder activism has prompted speculation that recent low share prices could result in the acquisition or privatization of certain companies.
Internationally, real estate in both Europe and Asia benefitted from ongoing economic improvements that boosted the office sector.
Oil prices continued to rally through the end of November, with OPEC and Russia coming to an agreement on production cuts for 2018. Rising production in the United States may be the wildcard in the energy markets, as current production is at 9.3 million barrels a day, just shy of the April 2015 peak of 9.6 million. Additionally, a cold start to the winter season may trigger a rise in natural gas prices in the last month of 2017.
Commodities declined slightly in November. The agriculture complex recovered slightly from pressures during the fall harvest in the U.S.
1 Bloomberg, L.P.
Macro managers generated slightly negative performance, driven by discretionary traders.
Systematic managers were flat overall, as those with a longer-term trading horizon tended to outperform shorter-dated counterparts.
Event-driven strategies struggled as key widely-held merger deals came under pressure due to regulatory uncertainty. In particular, large deals in the
semi-conductorand technology, media, and telecom sectors endured heightened scrutiny, causing spreads to widen.
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