Markets ease lower after jobs report is slightly better than expected

Dow dropped 123, decliners over advancers 4-3 & NAZ rose 159.  The MLP index slid 2 to the 307s & the REIT index was off 1 to the 425s.  Junk bond funds inched higher & Treasuries saw a little more buying which reduced yields.  Oil was off 1+ to the low 67s & gold gained 8 to 2656 (more on both below).

Dow Jones Industrials 

Entrepreneurs Elon Musk & Vivek Ramaswamy have an ambitious agenda to cut federal spending with the help of their outside advisory council, the Dept of Government Efficiency (DOGE).  But on their first joint visit to Congress yesterday, the pair also likely saw some of the limits of outside influence on the workings of the legislative branch.  Crisscrossing Capitol Hill together on a marathon day of meetings with lawmakers, Musk & Ramaswamy got warm welcomes from Reps.  Their overall message was popular, too: A smaller federal gov, looser regulations & a private sector approach to the public sector have long been cornerstones of conservative governance.  But there was also an elephant in the rooms they visited: An unspoken understanding that Musk's stated goal of slashing federal spending by $2T is already DOA.  In fiscal 2023, for example, the federal gov spent a total of $6.1T, according to the nonpartisan Congressional Budget Office.  Of that, about $3.8T was already off limits for cuts on day 1, legally obligated to go toward mandatory spending programs like Social Security benefits for retired workers, Medicare coverage & veterans benefits.  After that, roughly $650B was set aside to pay the interest on the national debt.  This left $1.7T for everything else, known as discretionary funding.   $805B of this was spent on national defense, a largely untouchable pot of money.  Finally, the remainder was divided up among the federal departments that perform much of the visible, daily work of gov, agencies like FEMA, NASA & Customs & Border Protection.  While Musk & Ramaswamy went from meeting to meeting, Reps close to the gov funding process, like House Appropriations Committee member Steve Womack said that while some cuts were possible, the $2T that Musk talks about would likely be a bridge too far.  “If you’re going to leave the social safety net programs alone and not touch them, that means you’re going to try to cut hundreds of billions of dollars out of discretionary spending” if you want to achieve massive, DOGE-style reductions, he said.  “It would be very difficult to do that without cutting national security,” said Womack.

DOGE’s Musk, Ramaswamy try to sell Congress on huge spending cuts

Chicago Federal Reserve pres Austan Goolsbee said that economic conditions will determine how fast the Federal Reserve cuts rates from here, but added he hopes the Fed will be homing in on a stopping point by the end of next year.  "I'm hopeful that conditions continue to evolve such that we can get in close to the range" where monetary policy is having a neutral impact on the economy, Goolsbee said.  While he would not specify his estimate of neutral, he said that a level around 3%, well below the current 4.5-4.75% rate & roughly the median that Fed officials projected as a stopping point at their Sep meeting, "doesn't seem crazy to me."  The Fed is expected to cut interest rates by another qtr of a percentage point at its upcoming Dec 17-18 meeting & also update policymakers' projections of where they see the economy and rate policy heading next year.  Goolsbee, who will be a voter on interest rate policy in 2025, laid out his views in an interview, describing an economy that he feels is at or close to full employment & expected to make progress to the Fed's 2% inflation target.  It is a situation where he said the Fed could continue to cut rates at a gradual pace as officials watch the evolution of the economy & settle on a stopping point.  At this point he said it would take an unexpected jump in inflation or a surprise tightening of the job market to push the Fed in a different direction, he added.

Fed's Goolsbee hopes neutral can be in sight by late next year

Consumer sentiment in Dec jumped to its highest level in 8 months.  A closer look at the University of Michigan's consumer sentiment survey shows that how Americans are feeling about the economy depends on their political affiliation.  According to the survey, economic sentiment among self-identified Reps jumped to a reading of 81.6 this month, up from a reading of 69.1 at last check & the highest level since Nov 2020.  Meanwhile, sentiment among Dems tanked to a reading of 70.9 from 81.3 in Nov.  Sentiment among Dems hit its lowest level since Sep 2020.  Sentiment over the last presidential cycle has held firmly along party lines.  The political divide in how Americans are perceiving the economy isn't new, but it could be creating a quandary for the Federal Reserve.  Inflation expectations are a key part of the Fed's calculus on interest rates, with higher anticipated inflation likely pulling forward spending & lower inflation expectations seeing spending delayed.

Economic optimism jumps for Republicans, sinks for Democrats

Gold traded higher as treasury yields fell after the US added more new jobs than expected last month.  Gold for Feb was last seen up $10 to $2658 per ounce.  The Bureau of Labor Statistics reported the country added 227K new jobs last month, above expectations for a rise of 214K & well higher than the unusually low rise of 36K jobs a month earlier.  The unemployment rate rose to 4.2% from 4.1% in Oct.  The data shows the the US labor market remains solid, easing pressure on the Federal Reserve to speed up interest-rate cuts.  The central bank is still widely expected to lower rates by 25 basis points at the Dec 18 end of the bank's policy committee meeting despite comments last month from Fed Chair Jerome Powell suggesting the Fed may slow the pace of cuts.  While Powell didn't give a ringing endorsement of a Dec cut, the bar is high for a skip & would take some big data to really upset the cut.  The $ was higher following the jobs data, with the ICE dollar index last seen up 0.36 points to 106.07.  Treasury yields fell, with the 2-year note last seen paying 4.108%, down 4.2 basis points, while the yield on the 10-year note was down 1.3 points to 4.162%.

Gold Trades Higher as Yields Drop After the U.S. Added More Jobs than Expected in November

Oil prices fell, with weak demand in focus after the OPEC+ group delayed a planned increase in supplies & extended deep production cuts until the end of 2026.  Brent crude futures were down 20¢ at $71.89 a barrel & West Texas Intermediate crude futures were down 14¢ at $68.16 a barrel.  For the week, Brent was fell 1.5%, while WTI inched up 0.2%.  The Organization of the Petroleum Exporting Countries & its allies yesterday delayed the start of oil output increases by 3 months to Apr & extended a full phase-out of production cuts by a year to the end of 2026.  OPEC+ is responsible for about ½ of the world's oil output, had planned to begin winding down production cuts in Oct 2024, but slowing global demand, particularly in China, & rising output elsewhere have forced it to postpone the plan several times.  The outcome of the last OPEC+ meeting surprised everybody.  The extension of the production cuts shows that the group remains united & still aims to keep the oil market balanced.  Contrary to market expectations, UBS expects falling oil inventories this year & a balanced market in 2025 to support higher prices in the coming months.  Brent has largely held within a tight range of $70-75 a barrel in the past month, as investors weigh weak demand signals in China & rising geopolitical risks in the Middle East.

Oil Prices Down Slightly on OPEC+ Supply Cuts

Stocks mostly rose as investors digested the last monthly jobs report of the year, a crucial test of the prospects for interest rate cuts in Dec & beyond.  The daily results of the major gauges also reflected their anticipated weekly performances.  The Dow shed 258 for the week.  Markets were pricing in near-90% odds the Fed lowers rates by a qtr percentage point on Dec 18.