The dream of a March rate cut has survived the December jobs report.
The dream of a March rate cut has survived the December jobs report.
The Department of Labor said employers added 216,000 jobs to their payrolls in December, a much faster pace of hiring than the 170,000 Wall Street was expecting. The unemployment rate held steady at 3.7 percent, defying predictions that it would climb up to 3.8 percent.
The initial reaction in markets was a swift but short-lived reconsideration of the expectation that the Federal Reserve will lower its benchmark interest rate at its March meeting. Prior to the release of the numbers, the market was pricing in around a 75 percent chance of a March cut. Immediately after the release, the odds fell to around 57 percent.
But by midday on Friday, they had climbed nearly all the way back to the pre-jobs numbers odds.
The bond market followed the same pattern. Treasury prices fell and yields climbed, with the 10-year Treasury yield rising above four percent, hitting its highest point since just before the dovish December meeting of the Federal Open Market Committee. As traders digested the jobs figures, however, the 10-year yield slipped below the prior day’s close of 3.991 percent.
The equities market marched in lockstep, selling off in pre-market trading and then rallying when the cash market opened. By mid-day, the Nasdaq Composite was up by 0.41 percent, the S&P 500 up by 0.38 percent, and the Dow Jones Industrial Average was up by 0.10 percent. Nine of the eleven sectors of the S&P were up for the day, with real estate and consumer staples the only laggards. This rally was all the more notable because stocks had been down for the first three trading days of the year, a relatively rare weak start for the year by historical standards.
The market appears to have decided to focus on the idea that the strong jobs numbers could bolster a “soft landing” scenario in which economic growth remains strong while ignoring the risk that the numbers could be a warning sign for resurgent inflationary pressures.
