Stock Market News: S&P 500 Falls Sharply After Strong December Jobs Report
Wall Street’s reaction to the strong December jobs report shows just how much bond yields and interest-rate expectations are driving the stock market these days.
The Dow was down 700 points, or 1.7%, in Friday trading. The S&P 500 was down 1.7%. The Nasdaq Composite was slid 2%.
The latest jobs report actually painted an upbeat picture of the labor market and an easing in wage growth pressures. A strong economy is bullish for corporate earnings, but market participants are currently laser focused on bond yields and falling rate-cut odds.
The yield on the 2-year Treasury note was up to 4.38%. The 10-year yield was up to 4.75%. The 30-year yield rose to 4.94%. Odds of a January rate cut dropped to 2.7% from 6.4% on Thursday, according to the CME FedWatch Tool. Odds the Fed will not cut rates at all this year rose to 25.3% from 13.4% on Thursday.
BofA U.S. economist Aditya Bhave argued that in the wake of the report, the Federal Reserve will stop cutting rates. While he forecasts an extended hold, he sees risks for the Fed to hike rates if core personal consumption expenditures price inflation rises above 3%.
If the Fed is forced to hike rates, that would surely hit stocks. But traders are pricing in no chance of a hike this year, according to the CME FedWatch Tool. It would take a wave of too-hot inflation prints to get the Fed hiking rates again.
For the stock market, though, a strong economic picture may take center stage once the market accepts rates are holding steady, at least in the near term. Citi strategist Scott Chronert points out that for now, the stock market is reacting negatively to positive surprises in economic data.
“However, the good economic news is bad market news backdrop tends to not be very sticky,” Chronert writes. “A reduction in recession probability tends to come with a steeper curve, which has also been at work in the background. That tends to support higher equity multiples.”
That doesn’t mean the market will wake up immediately.
“To realize that markets likely need to work off euphoric sentiment levels as the notion that accelerating growth and declining rates can persist in tandem for the long run is not realistic and too optimistic,” he writes.
Of course, that’s only if you trust the numbers will stand up to revisions. Peter Boockvar, chief investment officer of Bleakley Financial Group, writes that employment expectations in the University of Michigan’s January consumer sentiment survey fell to 66, the lowest numbers since July 2009. While he thinks hiring is “OK” he doesn’t think it’s as strong as the latest jobs report reflects.
Dylan Smith, senior economist at Rosenberg Research, also notes that the jobs report “flew in the face of recent softness in the JOLTS data and ADP private payrolls report.”
Smith points out that half of the growth in jobs came from government, healthcare, and education sectors. And 80% of job creation was in part-time jobs, and 75% in youth aged 16 to 24. While the Fed will need to work with the data it has, Smith points out revisions last year were massive.
“The strong headline number can’t be ignored,” Smith writes. “But the discrepancy with alternative sources like the JOLTS and ADP report and the somewhat odd seasonality all put more importance on the upcoming February [Quarterly Census of Employment and Wages] benchmark revision exercise.”