U.S stocks and bonds moved in the opposite direction at the end of last week, caught between a blowout job report showing that the U.S economy continued to add jobs at a brisk rate, and solid earnings from Meta and Amazon.
The S&P 500 closed at 4,958.61, up 1.07% for the day; the Dow Jones at 38,564.43, up 0.35%, and the tech-heavy Nasdaq at 15,628.95, up 1.74%.
Meanwhile, bond prices moved in the opposite direction. The benchmark 10-year U.S. Treasury bond ended the week with a yield of 4.03%, up from 3.90% in the previous two trading sessions.
In its regular labor market report released on Friday morning The U.S. Bureau of Labor Statistics (BLS) said the economy added 353,000 jobs in January 2024, up from an upwardly revised 333,000 in December, smashing market forecasts of 180,000. Job gains were led by professional and business services (74,000), followed by health care (70,000), retail trade (45,000), social assistance (30,000), manufacturing (23,000), and government (36,000).
"The labor market is having a 'Groundhog Day' moment, as once again, the labor market has blown past consensus expectations," Noah Yosif, chief economist at the American Staffing Association. "While growth was skewed towards industries generally less sensitive to the business cycle, including health care and government, increases were seen throughout the private nonfarm sector."
Solid job growth helped keep unemployment steady at 3.7% -- close to a record low -- meaning that the labor market remains tight, pushing labor pay higher. Average hourly earnings rose by 19 cents, or 0.6 in January, twice the market expectations of 0.3 percent. It's the biggest rise since March 2022, reviving fears of another round of inflation spikes, as producers will eventually pass these higher costs on to consumers.
That makes it less likely that the Federal Reserve will cut interest rates anytime soon, prompting a sell-off in Treasury bonds, and the interest rate-sensitive sectors of the equity market like home-builders and consumer discretionary.
Still, the sell-off in interest rate-sensitive sectors of the market wasn't enough to hold back the broader market dominated by tech shares like Amazon and Meta. They staged an enormous rally, helping major equity indexes reach new highs.
"The stronger than expected jobs report shows how the job market continues to be a bright spot within the U.S. economy," Joe Gaffoglio, President of Mutual of America Capital Management, a company with $26 billion in AUM, told International Business Times. "Fed Chair Jerome Powell recently signaled that interest-rate cuts may not start as soon as the market wanted, and this jobs report hasn't given him any reason to change that stance."
Gaffoglio sees higher wages continuing to be a tailwind for middle class consumers, but he's concerned about the impact of higher prices and interest rates on future spending.
"While many middle-class consumers have benefited from strong wage growth over the past couple of years, they continue to deal with high prices for many goods and services," he added. "Spending may also be impacted by higher interest rates, the resumption of student loan payments and the inevitable exhaustion of pandemic savings, all of which have contributed to increasing levels of consumer debt. Given the importance of consumer spending to the U.S. economy, we are watching unemployment claims, wage growth and other data that may further affect consumers' financial health."
Sonu Varghese, Global Macro Strategist at Carson Group, sees the solid January job report prompting the Fed to defer interest rate cuts towards the middle of 2024.
"A blockbuster payroll report with 350,000 jobs created, well above expectations, with unemployment staying at 3.7%, is confirmation that the economy remains strong," he told IBT. This report also reduces the odds of a rate cut in March and pushes the timing of the first rate cut to May."
