The week in review pretty much begins and ends with Friday since the market was preoccupied all week with the question of whether the November employment report would prompt the Fed to make a tapering decision at its December meeting. The answer to that question was basically yes, no, and maybe.
The report, which featured a 203,000 increase in nonfarm payrolls and a drop in the unemployment rate to 7.0% from 7.3% that was not driven by a decline in the labor force participation rate, was solid enough to convince participants that the labor market is improving but not strong enough necessarily to force the Fed's hand into tapering this month.
Whatever unfolds, the overriding message of the market on Friday was either that it didn't believe there would be a tapering this month or that it doesn't fear a tapering this month (or next month). Both the 10-yr note and the stock market pushed higher on Friday while gold prices and the US Dollar Index were little changed.
They were moves that stood in contrast to the tapering angst that existed earlier in the week after the release of the better-than-expected ISM Index, higher-than-expected auto sales, a 25% increase in new home sales for October, lower-than-expected initial claims, and an upwardly revised 3.6% GDP growth rate for the third quarter (more on that in a bit).
Every sector finished higher on Friday and so did every Dow component. For the week, the best-performing sectors were the utilities (+0.8%), technology (+0.7%), consumer staples (+0.1%), and energy (+0.04%) sectors, so a bit of a cyclical and counter-cyclical mix, which probably reflected some hedging with respect to the tapering idea and the thinking that the market is due for a pullback of some kind after its extraordinary rally.
Still, it was clear that money wasn't in a hurry to leave the stock market this week. That may have been owed to the thinking that another buy-the-dip run would be seen -- and sure enough that ended up being the case.
Now, in terms of the GDP report, it wasn't as robust as it appeared to be at first blush. The change in inventories accounted for 1.68 percentage points of the change in GDP; moreover, personal consumption expenditures were up just 1.4% (lowest since Q4 2009) while real final sales, which exclude the change in inventories, were revised down to 1.9% from 2.0% in the first estimate.
It is almost certain that there will be some inventory payback in the fourth quarter that will act as a big drag on fourth quarter GDP. Briefing.com's current forecast calls for growth of just 0.8%.
The Fed will be cognizant of that inventory drag (New York Fed President Dudley spoke about it in a speech a few weeks ago), which is one reason why there is still room to think it will hold off on a tapering decision for the time being. Another reason embedded in the November employment report is the fact that the number of people unemployed for 27 weeks or more accounted for 37.3% of the unemployed, up from 36.1% in October, demonstrating the ongoing difficulty of finding a new job after being out of work for so long.
Emergency unemployment benefits are due to expire January 1 if Congress doesn't strike an agreement to extend them. On a related note, there were reports this week that negotiators are close to striking a budget agreement that will prevent another government shutdown, but that emergency unemployment benefits are creating a sticking point in those talks.
The budget negotiations promise to be a focal point in the week ahead along with the Retail Sales report for November and Q3 GDP data for Europe.
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