Markets spent the week processing a combination of last week’s message from the Fed and this week’s economic data which favored a dovish Fed tone going forward. The delayed nonfarm payroll report for October showed the highest number of job losses since 2020 at 105,000. However, the trend reversed course for November with the economy adding 64,000 jobs. The unemployment rate also jumped to 4.6%, a four-year high and a level already exceeding the year-end target the Fed specified in last week’s Summary of Economic Projections. As usual, new jobs were concentrated in healthcare, social assistance and construction. Regarding the total effect of the government shutdown, the Bureau of Labor Statistics commented, “It is not possible to precisely quantify the effect of the federal shutdown on household survey estimates for November.”

In addition to a struggling labor market, the FOMC’s cut last week was justified by the November CPI report which was released yesterday. CPI unexpectedly dropped to 2.7%, its lowest level since 2021. Many will view that figure as affirmation that the FOMC is on the correct path with labor cooling as inflation ticks down. However, experts would call this month’s CPI print ‘noisy’ at best because no data was collected for October, leaving statistical models to assume no price movement. Shelter, airfare and apparel costs have been elevated all year but were nearly absent from this month’s reading, leaving some to hold off on taking these figures at face value. Either way, the matter is expected to be resolved in future revisions. 

Fannie Mae and Freddie Mac are making headlines again in what appears to be a subtle attempt to ease pain in the housing market. Both private companies grew their combined retained bond and loan portfolios by 25% in five months prior to October to $234 billion, the highest since 2021. The Trump administration has remained quiet about the MBS purchases but has stated repeatedly they’re not afraid to use the mortgage giants to bring housing costs down. Vitaly Liberman, portfolio manager at Doubline Capital, commented, “If you want to lower mortgage rates, one of the most direct ways to do so is simply directing the GSE to purchase more mortgage bonds. The administration is looking at everything.” 

KEY INDICATORS THIS WEEK

Labor market – Unemployment rate=4.6%; Labor force participation rate=62.5%; Initial jobless claims=224,000; Continuing claims=1,897,000; ADP Weekly Employment Change=16.25k/week
Next Week – GDP and Happy Holidays!