Friday’s jobs data in the US, and more specifically, the market reaction to Friday’s jobs data helped stock markets to record their best boost since more than a month on Friday.
However, Friday’s jobs report was rather… mixed, and spurred a lot of discussions and debates regarding whether the data was soft enough to convince the Federal Reserve (Fed) officials that the inflation battle is over, or it was strong enough to make them further scratch their heads.
The NFP printed 223’000 nonfarm job additions last month versus 200’000 expected by analysts.
But the average job additions for the last three months of last year was a touch below 250’000, down from 366’000 from the prior three-month stretch, and less than half of around 540’000 jobs added each month in the first quarter of 2022.
Plus, the tech industry shed job – in line with the headlines we have been reading since months. Goldman just announce it will be cutting 3200 positions, on top of 18’000 job cuts announced by Amazon last week, among others.
So, the trend in the US jobs market is on a slowing path, even though, monthly job addition prints above 200’000 are far from numbers you expect to see in recession.
But that’s the good news. The Fed is not looking to push the US economy into recession for fun, it wants to see the jobs market tighter because, in theory, a tighter jobs market should help ease inflation.
But if inflationary pressures ease with little negative impact on jobs, that’s what we call the goldilocks scenario: a soft-landing from the ultra-supportive monetary policy euphoria, easing inflation without too much pain on jobs market.
In other words, it’s jackpot for the Fed!
This is why, the US markets gave such a strong positive reaction to Friday’s jobs data. Both the US 2 and 10-year yields fell more than 4% after the data, pulling the US dollar index lower along with them. The S&P500 jumped around 2.30%, while Nasdaq 100 rallied near 2.80%.
Gold reached our $1880 per ounce medium term target, boosted by lower US yields, which made the opportunity cost of holding the non-interest-bearing gold lower, and increased appetite.
But we should still not forget one thing: the US economy added around 4.5 million jobs last year- That was the second best year on record after 2021 – where 6.4 million Americans found jobs following the pandemic-shattered economy. The unemployment data hit 3.5%, a multi-decade low, and Atlanta Fed President Raphael Bostic said that the central bank still needs to keep raising the rates despite the cooler-than-expected wages data.
‘Good’ bad news is that the December services PMI fell to below 50, the contraction zone, in December, adding some more evidence that the US economic activity is slowing. And that’s something that the Fed is happy to hear.
Activity on Fed funds futures now price in a 25bp hike at the next FOMC meeting at around 75%, but the Fed has not hesitated to disappoint markets since last year to cool down the optimism and send the stocks to turmoil. So the dovish pricing in Fed expectations make the latest gains a bit bitter-sweet, as the slightest news, or hints that the Fed would not step back from its hawkish tone could vanish the latest rally.
So, this week’s US inflation data will be key in either giving the bulls a further boost or bringing back the bears with revenge.
On Tuesday, Fed Chair Jerome Powell will speak, and he may not hesitate to abate the Fed doves on rate expectations.
On Thursday, the US CPI data will likely reveal an encouraging easing. The US CPI is expected to have eased to 6.5% in December from 7.1% printed a month earlier, and from 9.1% printed last summer. If that’s the case, the rapid fall in inflation figures could further boost the Fed hawks and help stocks and bonds extend rally, and the dollar extend drop. But if we see a smaller easing in December inflation, or a figure higher than last month’s, the latest gains could rapidly vanish.
Earnings season kicks off
Earnings season kicks off this week, with Jefferies and Tilray due to report their latest earnings today, Bed, Bath and Beyond – which warned last week that it could go bankrupt – is due to reveal its latest results on Tuesday, while JP Morgan, Bank of America, Wells Fargo, Blackrock, Citigroup, Bank of New York and Delta Air Lines will announce their Q4 earnings on Friday.
For banks, investors will focus on the level of bad loan provisions and mortgages, as rising interest rates are good for earnings, but higher-than-expected interest rates threaten credit quality, loan growth, and net interest margins.
