Topline
Stocks surged Friday on news of a cooling labor market, a necessary condition for the Federal Reserve to stand down from its most aggressive monetary policy in decades which has sent stocks spiraling, even though a prominent Fed official said the latest jobs report did little to change his mindset.
Friday was a not too shabby day for the Dow.
Key Facts
The U.S. added more jobs than expected in December and the unemployment rate surprisingly fell, according to data from the Labor Department, while wages were up 4.6% on a 12-month basis, the slowest pace of worker pay gains since August 2021.
Considering the Fed calls unsustainable wage growth the top contributor to inflation, markets welcomed signs of slowing wage increases with open arms.
The Dow Jones Industrial Average rose 680 points, or 2.1%, its largest daily gain since November 30, while the S&P 500 and tech-heavy Nasdaq gained 2.3% and 2.5%, respectively.
Bonds similarly recovered, with 10-year Treasury yields dipping 16 basis points to 3.56%, its lowest rate in nearly three weeks.
“Finally, there is good news for investors,” Bolvin Wealth Management Group’s president Gina Bolvin wrote in emailed comments.
Contra
Raphael Bostic, president of the Fed’s Atlanta branch, doused cold water on the early declarations of a Fed pivot, telling CNBC the latest jobs data “doesn’t really change my outlook at all,” adding the Fed has “got to stay the course” in its rate hike campaign.
Key Background
The U.S. central bank increased the federal funds rate, which sets the interest costs for lending between banks and guides borrowing costs across industries, seven times in 2022. Major stock indexes subsequently notched their worst annual returns since 2008, as equities typically slip with higher interest rates as higher borrowing costs drag on corporate earnings. Though the federal funds rate sits at its highest level since 2007, no Fed official backed rate cutes at any point in 2023 at its policy-setting committee’s latest meeting in December. Given that, the real question in the eyes of the market is if the Fed considerably slows the pace of its hikes following the committee’s next meeting January 31 and February 1, having increased rates by 0.5% at its last gathering after four consecutive 0.75% hikes. CME Group’s closely tracked FedWatch tool projects a 76% chance of a 25 basis-point increase at the Fed’s next meeting, compared to a 24% chance for another 50 basis-point increase.
Crucial Quote
“Today’s employment report was a clear indication that labor market dynamics are softening somewhat…[but] we think the Fed is not ready to pause yet, and that we need some further downside momentum in employment for the Fed to feel like it is reaching a balance,” Rick Rieder, head of BlackRock’s global investment allocation unit, wrote in a Friday note.
Further Reading
Unemployment Rate Falls To 3.5%—But Job Quality Is Deteriorating—As Fed Works To Fight Inflation (Forbes)
Dow Falls 300 Points As Worsening Layoffs Confirm Tech Selloff Could Linger ‘A While Longer’ (Forbes)
