Dow trims early gain as investors await more labor-market data

What’s driving markets

U.S. businesses added 103,000 new jobs in November, paycheck company ADP said, in another sign of slower hiring and a softer U.S. labor market. That was below the 128,000 consensus forecast from economists polled by The Wall Street Journal.

The ADP payroll estimate is usually not a reliable predictor of the U.S. Bureau of Labor Statistics’ more comprehensive and closely watched employment report, which comes out Friday at 8:30 a.m. Eastern time, but both surveys have signaled a deterioration in the jobs market that could support the soft-landing narrative for some Fed officials and investors.

The U.S. is expected to report 190,000 jobs added in November after a 150,000 increase in the prior month, according to economists. The percentage of jobless Americans seeking work is forecast to stay the same at 3.9%, leaving it at the highest level since the beginning of 2022.

Investors will also monitor jobless claims numbers on Thursday, which could also provide hints about the state of the economy and whether higher interest rates are having their desired effect in cooling the economy.

For all of last month, U.S. stocks put in robust performances, with the Dow Jones and S&P 500 each gaining more than 8%, while the Nasdaq Composite climbed 10.7%.

“We had such a good run in November that investors are trying to make sure that the run was worth taking,” said Jay Sommariva, managing partner and head of asset management at Pittsburgh-based Fort Pitt Capital Group, which oversees roughly $4.9 billion.

With more jobs data on the way this week, “the market wants to see that the labor market isn’t as robust as it has been in the past and that there’s some sort of slowdown in hiring,” Sommariva said via phone on Wednesday. “Until we see a slowdown in that, in the back of everyone’s minds is the possibility that the Fed can still do something and raise rates again in the near future.”

The yield on the 10-year Treasury
BX:TMUBMUSD10Y
was falling 5.5 basis points to 4.12% on Wednesday, extending the 11.5-basis-point decline seen in the prior session when October data showed job openings reaching a 28-month low. The benchmark 10-year yield is in the process of dropping for the 11th day out of the past 14 trading sessions — a reflection of expectations for slower growth and inflation in the fourth quarter, and more confidence that the Fed will reduce rates in 2024. Yields move in the opposite direction to prices.

In other U.S. economic data, the U.S. trade deficit widened in October to a three-month high of $64.3 billion due to a decline in exports, according to government data published Wednesday. Meanwhile, imports inched up 0.2% in October to $323 billion, mostly because of higher demand for computers and equipment to drill for oil.

The evidence that a soft landing will allow the Fed to cut rates sooner than expected in 2024 has supported the recent rally in equities and bonds despite the Dow Jones and S&P 500 taking a breather during the first two days of this week.

Markets were pricing in a 60.2% chance of a Federal Reserve rate cut by March, up from 20.3% a month ago, according to CME FedWatch Tool.

“This looks too optimistic to us,” said Solita Marcelli, chief investment officer for the Americas at UBS Global Wealth Management. “As a result, we believe the upside for the S&P 500 is now relatively limited, with the index likely to end the year around 4,700.”

Marcelli and her team think that as growth slows, investors should consider high-quality stocks from companies with strong returns on invested capital, resilient operating margins, and relatively low debt on their balance sheets.

Markets were also listening to the testimony of top bank CEOs including JPMorgan Chase’s
JPM,
-0.65%
Jamie Dimon, in front of the Senate Banking Committee. In prepared comments, Dimon said that, if proposed rules to increase capital requirements are enacted, banks would be limited in their ability to deploy that capital when it is most needed.

Companies in focus

• Tesla Inc.
  TSLA,
  +1.47%
  shares rose 1.6% amid indications from Chief Executive Elon Musk that a smaller, less-expensive version of the company’s electric vehicle could arrive sooner than investors have assumed.

• Class B shares of Brown-Forman Corp.
  BF.B,
  -10.16%
   slid 10% on Wednesday, after the parent to Jack Daniel’s whiskey posted weaker-than-expected fiscal second-quarter earnings and said a challenging operating environment is tempering its expectations for the year. 

• Campbell Soup Co.’s stock
  CPB,
  +7.05%
   rose 7.1% after the company said it may outpace analysts’ estimates for 2024 earnings per share.

Steve Goldstein contributed.