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- US stocks climbed after the December payrolls report, but analysts said hurdles remain for the market.
- Inflation is moving in the right direction with monthly wage growth slowing.
- But the Fed is likely to keep pushing back on expectations that it will cut interest rates this year.
The mixed bag that was the December jobs report contributed to propelling US stocks higher this week, but analysts said a solid trend of equity gains may still be elusive while economic growth prospects and Federal Reserve policy this year remain in question.
Stocks were poised to have a “good day” on Friday on data that showed inflation remained on a downward trend, Edward Moya, senior market analyst at Oanda, told Insider. The S&P 500, Nasdaq Composite, and the Dow Jones Industrial Average each finished the day higher by more than 2%.
The Labor Department’s final monthly jobs report of 2022 showed continued strength in the labor market, with headline payrolls increasing by 223,000. That figure outstripped the 200,000 jobs expected in a Bloomberg survey of economists.
But investors appeared to latch onto slowing wage growth for American workers as the Fed has been aggressively working to pull down inflationary pressures. Average hourly earnings rose by 0.3%, less than the 0.4% consensus estimate. Also, the unemployment rate fell to a 50-year low of 3.5%.
Stocks climbed after the jobs report, which was joined by December services data from the Institute for Supply Management showing prices paid decelerated, another sign of easing inflation.
While there’s been progress on inflation, it’s still well above the Fed’s 2% target. Moya said Fed policymakers are more than likely to keep telling markets more rate hikes are in store– a message not widely welcomed by equity investors.
“The Fed knows that there’s still a lot more work to be done. They’re going to have to stick to that script because the bond market shows yields going down – that puts them away from their tightening, that puts them away from their objective. We still have a lot more price declines to see before we can comfortably say, ‘Mission accomplished.’
Lower bond yields suggest traders expect the Fed to start cutting rates in 2023 in the face of a recession. The ISM report on Friday showed services activity, a key engine of the US economy, contracted for the first time since May 2020. The 2-year, 5-year, and 10-year Treasury yields each dropped on Friday as bond prices rose.
Minutes from the Fed’s meeting in December showed no policy makers expect to cut rates in 2023.
Friday’s rally in stocks helped the S&P 500 and the Nasdaq Composite land their first weekly wins after four weeks of losses.
“I don’t think we’re at a point yet where we’re ready to say that anything is really sustainable in one direction or the other at this point because there’s still so much mixed data coming in,” Thomas Martin, senior portfolio manager at Globalt Investments, told Insider.
“That’s the big debate – what really is the chance of recession? Anecdotally, or intuitively, it feels like there’s a fairly wide range of expectations with regard to whether we’re going to even have a recession and how bad that recession will be,” he said. “The Fed itself is plus or minus zero for this year in [outlook] terms of GDP growth,” he said.
Martin said a wide range of outlooks have emerged among strategists for where the S&P 500 will settle in 2023 after the index’s 19% slide last year.
With a lag effect associated with rate increases, Martin said investors trying to work out whether there are enough offsetting factors for the world’s largest economy to experience just a mild recession after seven rate hikes from zero percent or if the economy is destined for a hard landing.
This week’s ADP private payrolls report showed hiring was strong at small-and medium-sized businesses while there was a drop at large companies.
“It’s kind of a bifurcation in the market, and you can see it anecdotally with the Amazon announcement of laying people off and a lot of layoffs in larger tech companies,” said Martin.
On the inflation front, investors will get their next look at consumer prices on January 12 with the CPI report for December.