US stocks had their best day in more than a month as traders speculated that a slowdown in wage growth will keep the Federal Reserve from having to intensify its battle against inflation. Treasuries rallied and the dollar dropped.
(Bloomberg) — US stocks had their best day in more than a month as traders speculated that a slowdown in wage growth will keep the Federal Reserve from having to intensify its battle against inflation. Treasuries rallied and the dollar dropped.
The S&P 500 jumped more than 2% to salvage the first weekly advance in the past five, while the Nasdaq 100 rose 0.9% in the four days. The dollar suffered its longest streak of weekly losses in two months as cooler wage growth outweighed an otherwise solid jobs report to fuel expectations the Fed will slow its pace of rate hikes.
Treasuries advanced Friday, with sharp declines in short-term yields where the policy-sensitive, two-year rate fell the most this week since November.
The eagerly anticipated December jobs report failed to offer a clear picture of the state of the American labor market, especially since it came a day after two jobs readings signaled continued tightness. Hiring exceeded estimates for the month and unemployment fell to the lowest in decades. Traders continued to mull how that strength contrasts with the weaker gains in hourly wages and what that means for Fed policy ahead. A reading on conusmer prices is due next week.
“A new 53-year low in the unemployment rate is a real problem, suggesting the Fed made zero progress toward relieving labor market strain in 2022,” wrote Chris Low, chief economist at FHN Financial. “But the combination of the downward revision to November average hourly earnings and a lower-than-expected December rise buys the FOMC more time.”
Recent data only complicates the central bank’s task and creates uncertainty for traders. Kansas City Fed’s Esther George, on Friday, warned that officials will have a tough road ahead as they attempt to balance inflation and employment. Other Fed officials have also continued to be hawkish, saying that while data has been encouraging and inflation is easing, the central bank still has more work to do.
Read More: Fed Officials Call for More Hikes Even as Price Pressures Cool
Swaps contracts show investors now expect the policy rate to peak at under 5% this cycle, down from 5.06% just before Friday’s jobs report. While traders remain divided about the size of February’s hike, with 33 basis points of tightening priced in it appears that a quarter-point move is seen as more likely than a half point increase.
Traders are now awaiting December’s inflation reading that releases next week for further clues about the economy.
Read More: Traders Slash Fed Bets After Data; Key Yield Inversion Deepens
Here’s what else Wall Street is saying about Friday’s jobs report:
Mike Bailey, director of research at FBB Capital Partners:
“It seems like good news is good news, for a change. Sometimes a hot jobs number is bad news, but investors are seeing the glass half full this morning. Lower wages are pouring cold water on Jay Powell’s plans for more tightening. I would broaden the conversation to add lower-than-expected inflation in Europe and a down market for stocks this week. Put these together with lower US wages and you get a narrative that stocks are cheap, inflation is fading, and investors need to get busy filling out their portfolios before it’s too late.”
Priya Misra, global head of interest rate strategy at TD Securities:
“The market is reacting to the weaker wages number but I think the report reflects that the labor market remains very tight. The terminal rate priced in before the number was 5.04% and that still looks low to us given our call of the Fed ending at 5.25-5.5 but today’s report should not move it higher. All eyes on ISM services later and CPI next week. The market will remain torn on whether the Fed will hike 25 or 50 in Feb (we think 50)”
Seema Shah, chief global strategist at Principal Asset Management:
“A lower unemployment rate and weaker average hourly earnings growth is certainly going to get equity market bulls’ attention. Indeed, expectations for a soft landing in the economy have likely been boosted in light of today’s jobs report. Yet, with the unemployment rate back to the historic low of 3.5%, how realistic is it to expect wage growth to move meaningfully lower? The Fed will likely be skeptical.”
Lisa Erickson, senior vice president and head of public markets group at US Bank Wealth Management:
“The Fed is indicating a keen interest in seeing the labor market normalize. So, as long as we continue to see strong and robust labor growth, that again provides more opportunity for the Fed to overtighten as it goes over time because it’s really trying to bring that part of the economy to more of a slowdown.”
Some of the main moves in markets:
Stocks
- The S&P 500 rose 2.3% as of 4:01 p.m. New York time
- The Nasdaq 100 rose 2.8%
- The Dow Jones Industrial Average rose 2.1%
Currencies
- The Bloomberg Dollar Spot Index fell 1.1%
- The euro rose 1.2% to $1.0644
- The British pound rose 1.6% to $1.2094
- The Japanese yen rose 1% to 132.08 per dollar
Cryptocurrencies
- Bitcoin rose 0.3% to $16,900.11
- Ether rose 1.1% to $1,265.83
Bonds
- The yield on 10-year Treasuries declined 16 basis points to 3.56%
- Germany’s 10-year yield declined 11 basis points to 2.21%
- Britain’s 10-year yield declined eight basis points to 3.47%
Commodities
- West Texas Intermediate crude was little changed
- Gold futures rose 1.7% to $1,871.50 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Peyton Forte, Isabelle Lee and Elena Popina.
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