New York – The December jobs report dropped a bombshell on Friday, blowing past expectations as the data shows the job market is still going strong despite the Fed’s attempts to cool down inflation. This better-than-anticipated result led investors to seriously rethink predictions that the Fed will start slashing interest rates in the near future.
The report revealed that employers added 216,000 new jobs last month, soundly beating economists’ consensus estimate of 170,000. And the unemployment rate held steady at 3.7%, lower than anyone saw coming. The numbers paint a picture of an economy and job market that still have some kick left in them, leading traders to dial back bets that the Fed will do a 180 and start easing policy as early as March.
Initially, stocks and bonds stumbled out of the gate on the first trading day of 2023 after seeing the data. But soon enough, major indexes bounced back as the report seemed to inject confidence that the Fed can pull off a “soft landing” for the economy after all. That dose of optimism lifted the S&P 500 by 0.65%, the Dow Jones Industrial Average by 0.3% and the tech-heavy Nasdaq by 0.75%.
“This was a huge positive surprise showing the domestic economy continues humming along,” said Tim Ghriskey, chief investment strategist at Ingalls & Snyder. “At least for today, it reversed the profit-taking we’ve seen during the first week of the year.”
Treasury yields also walked back initial spikes. Lower bond yields mean investors see reduced chances of further dramatic Fed rate hikes, given the signs of continued economic strength.
But some economists urge caution against drawing any sweeping conclusions just yet. Joseph LaVorgna, chief U.S. economist at SMBC Nikko Securities, highlighted details hinting that labor demand is weakening under the surface. The number of private employees has dropped, hours worked have stalled out and temp hiring keeps falling month after month.
“The headline numbers look a tad better than expected, and people are taking it to mean the report’s a slam dunk,” LaVorgna said. “But scratch beneath the surface, and future labor demand is looking very soft while everything else points down.”
The Fed’s Benchmark Rate Now Stands at 5.25-5.50% as It Fights Inflation
The Fed has been jacking up interest rates rapidly from near zero last March as it attempts to slash demand and conquer stubbornly high inflation. Its benchmark rate now sits in a range of 5.25-5.50% after seven straight 0.75 percentage point hikes.
Markets soared late last year based on the belief that with inflation pressures cooling, the Fed would hit reverse and deliver rate cuts totaling 1.5 percentage points before 2023 is out. Traders saw a 74% chance of a rate cut kicking off in March, judging by futures pricing. But that may be jumping the gun if the economy stays resilient and keeps inflation elevated.
“This was a Goldilocks report for the Fed,” said Cliff Hodge, chief investment officer at Cornerstone Wealth. “It gives them cover to raise rates more and get restrictive, without spooking markets that they’ll overtighten and damage the economy.”
Indeed, core consumer price inflation increased to 6.5% in November, still well above the Fed’s 2% target. And Friday brought data showing euro zone inflation accelerated to 2.9% last month, reducing urgency for the European Central Bank to loosen policy.
With the global outlook muddied by China’s reopening, war in Ukraine and other curveballs, Fed Chair Jerome Powell has emphasized keeping rates higher for longer to ensure inflation doesn’t rear its ugly head again.
Financial Markets Absorb Strong Jobs Data
Beyond lowering hopes for rate cuts, Friday’s jobs numbers impacted markets in other ways too. Government bond yields tend to rise when the economic and inflation outlook improves, which slashes prices for Treasuries.
The yield on the 10-year Treasury note initially leapt from 3.88% to near 4% following the report. But it settled back at 3.98%, just a tick above the previous close, as traders saw the data supporting a soft landing theory.
The U.S. dollar also drifted 0.32% lower against a basket of currencies, while the euro strengthened 0.29% against the dollar on the back of the jobs numbers.
Stock indexes on Wall Street shook off morning sluggishness to climb firmly into positive territory. The improved risk appetite lifted tech shares, with Tesla jumping 5.5%, Nvidia 3.6% higher and Amazon tacking on 1.2%.
Oil prices got a shot in the arm as well on the risk-on move, rebounding after early declines related to demand worries as China reopens. U.S. crude rose 2.01% to $73.64 per barrel, while Brent crude gained 1.43% to $78.70.
In Japan, the Nikkei 225 added 0.3%, helped by a weaker yen boosting exporters. A deadly quake on January 1 had fed speculation the Bank of Japan might delay further easing at its January meeting, but those expectations faded after the U.S. jobs data hinted the Fed now has less room to turn dovish fast.
Outlook Still Uncertain Despite Solid Jobs Report
Even with the mood boost from December’s robust jobs growth, uncertainty continues to hang over the economic outlook for 2023. Plenty of questions remain up in the air.
How long can consumers and businesses withstand higher interest rates? Will the Fed stick to its hawkish stance if unemployment stays extremely low? When will inflation actually decline in a meaningful way? Is a recession destined to follow the epic monetary tightening?
Another wild card is how markets will react as China reopens, which could considerably sway inflation and growth worldwide. And the war in Ukraine brings ongoing geopolitical risks.
For the moment, investors are reassured that the U.S. economy and job market still have some vitality left despite the Fed’s fierce inflation fight. But the road ahead promises to be bumpy. Policymakers and markets will be glued to incoming data for any cracks that could warrant a more dovish shift down the line.
Friday’s jobs surprise gives the Fed space to keep aggressively hiking rates if need be. But it’s premature to conclude a soft landing is guaranteed, or that rate cuts will come as early as thought. The debate is sure to intensify as the year unfolds.
