Financial markets ignore the elephant in the room: the 223,000 jobs created in December

Stocks and bonds rallied in response to Friday’s jobs data showing modest wage growth for December, as investors looked past a stronger-than-expected increase of 223,000 non-farm payrolls .

Friday’s price action was the latest example of the willingness with which traders and investors have tried to hold on to any signs of slowing inflation and hopes for less aggressive policy from the Federal Reserve. U.S. stocks staged their first big rally of 2023 after the December nonfarm payrolls report showed just a modest 0.3% gain in hourly wages. Fed funds futures traders raised the likelihood of Fed rate cuts later this year and Treasury yields fell, led by a 25 basis point drop in the 3-year rate TMUBMUSD03Y ,

The latest data suggested a soft landing could be in the offing, with slower wage increases possibly helping the U.S. economy avoid a recession. The flip side of this debate, analysts say, is that traders and investors aren’t paying enough attention to December’s solid job gains of 223,000, which beat economists’ expectations for a 200,000 increase, and to an unemployment rate that fell to 3.5% from 3.6% despite continued Fed rate hikes in 2022.

“While investors appear to have judged that today’s batch of data supports the case for a soft landing, we remain of the view that the U.S. economy faces two challenging quarters,” said Oliver Allen, Senior Markets Economist for Capital Economics.

Continued strength in job growth and a falling unemployment rate “arguably support the Fed’s argument that it shouldn’t pivot for some time yet” and “with that in mind, we expect that the US stock market is struggling, even in the long run”. Treasury yields are falling a bit more,” Allen wrote in a note Friday.

Meanwhile, economists at BNP Paribas said that “policymakers seem increasingly frustrated with market prices at odds with signals from the Fed in terms of terminal funds rates and the timing of the initial cut in rates.” rate. This could tilt their bias towards a more forceful response at the next meeting. »

Read: The Fed has sent a message to the stock market: Big rallies will prolong the pain

And strategists at TD Securities said they expect the Fed to raise its main policy rate target to 5.5% in May, even after the firm largely missed the real mass number. salary in December with a forecast gain of 350,000 jobs.

In the past hour of trading, all three major equity indices were up, with Dow Industrials DJIA,
jumping over 700 points or 2.2%. Treasury yields ended the New York session lower, with the benchmark 10-year rate TMUBMUSD10Y,
below 3.6%.

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