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Why Fed Could Be in a Dilemma after Strong US Jobs Report

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Job additions zoom past expectations

The US jobs report for December was released today. The job growth in the US surged by 312,000, zooming past economists’ expectations of 180,000. Not only this, but there were also upside revisions in November’s job additions to 176,000 from 155,000, and October’s were revised to 274,000 from 237,000. The major gains in December were led by healthcare, restaurants and bars, construction, and manufacturing.

Average hourly earnings, the most closely watched piece of the jobs report, rose by 3.2% from the same period a year ago. The sequential growth was 0.4%. Both these measures surpassed expectations, which were calling for an increase of 3.2% annually and 0.3% sequentially.

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Unemployment rate

The third key measure of the jobs report, the unemployment rate, increased to 3.9% from 3.7% in November. However, this doesn’t signal any negative news, as the rate increased as more workers joined the workforce. The labor force participation rate increased to 63.1% from 62.9% in November. The broader measure of unemployment, which includes discouraged workers and workers holding part-time jobs remained steady at 7.6%.

This strong report comes close on the heels of other indicators that have raised markets’ concerns about a global slowdown. Yesterday, the ISM (Institute of Supply Management) manufacturing index fell to 54.1 in December compared to an estimate of 57.9. The index also reached the lowest level since November 2016. This coupled with Apple’s (AAPL) guidance cut amid the slowdown in China took its toll on the markets.

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The Fed will most likely be in a bind given the conflicting signals from the labor and financial markets. The labor market remains a bright spot in an otherwise deteriorating macro environment. So, while the Fed (TLT) might want to pause given the slowdown concerns, a tight labor market could prompt it towards tightening.

Market reaction

The markets opened higher today on the stronger-than-expected jobs report and strong gains in the tech sector led by Intel (INTC) and Netflix (NFLX). At 10:00 AM EST, the S&P 500 (SPY), the Dow Jones Industrial Average Index (DIA), and the NASDAQ Composite (QQQ) were trading up by 2.17%, 2.20%, and 2.44%, respectively. The SPDR Gold Shares (GLD) was down 1.1% as the US dollar climbed on a strong report.

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