U.S. Stocks React To Job Growth And Rate Cut Expectations

The U.S. stock market closed slightly higher on Friday, ending what has been its worst week since late October. The rocky start to 2024 erased the gains from the last two weeks of 2023, casting uncertainty over the trajectory of the market.

Job Growth And Key Economic Indicators

Job Growth: December showcased a pickup in U.S. job growth, exceeding wage gain expectations. Nonfarm payrolls increased by 216,000, although with downward revisions for the previous two months. The unemployment rate held steady at 3.7%, while average hourly earnings rose by 0.4% compared to the previous month.

Institute of Supply Management (ISM) Services Index: Released on Friday, the ISM services index dropped by 2.1 points to 50.6 in December, falling below Bloomberg estimates.

Market Response

The stronger-than-expected jobs data initially led to selling but later prompted a reversal during the day, only to meet selling pressure again by day’s end.

Market Projections And Reactions

Rate Cut Probability: Implied probability of a March rate cut has reduced to around 70%, signaling a shift in market expectations. Swaps for 2024 point to a total of 137 basis points of rate cuts, down from about 160 basis points noted last Wednesday.

Week’s Performance: The Dow closed down 0.59%, the S&P lost 1.52%, and the Nasdaq plummeted 3.25% in the first week of the year.

Here are the closing levels for Friday, January 5th, 2024:  

Index  Last  Change  %Change 
DOW JONES 37,466.11 +25.77 +0.07%
S&P 500 4,697.24 +8.56 +0.18%
NASDAQ 14,524.07 +13.77 +0.09%
U.S. 10Y 4.046% 
VIX 13.35 -0.78 -5.52%

Market Behaviour And Outlook 

The market showed two potential reactions to the jobs report: one favoring a rise due to strong labor market indicators indicating a robust economy, and the other prompting concerns about prolonged higher rates by the Fed.

Friday’s trading reflected this uncertainty, swinging between attempts to recover earlier losses and renewed selling pressure. While the day ended with gains, they fell short of the day’s highs.

Observations And Predictions

Echoing commentary from last year, the market’s trading pattern indicates signs of being overbought, suggesting a depletion of upward momentum. This doesn’t indicate a bear trend yet, but a lack of sustained buying might lead to a deeper correction.

Buyers seem focused on the anticipation of Fed rate cuts, while sellers are testing the resilience of dip buyers. Absence of sustained buying in the near term could indicate a potential for a more significant market correction.

Source: CBOE, Bloomberg

This commentary is written by James Gomes, a seasoned finance industry veteran with extensive experience of over 30 years, including a substantial tenure at a reputable U.S. bank exceeding 20 years. 

 


 

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