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“Goldilocks” Jobs Report & Price Action

U.S. stocks closed out the first week of 2023 on a high note after the market rallied on the back of a “goldilocks” jobs report.  

Nonfarm payrolls rose 223,000 (estimate was 203,000) in December after a revised 256,000 gain in November. 

Average hourly earnings rose a smaller than expected 0.3% (est 0.4%). 

The icing on the cake was a drop in unemployment to a 50-year low of 3.5%. 

The markets looked closely at these numbers and decided that the good pieces were reason enough to send the market higher. 

The main focus was the fall in hourly earnings which was anti-inflationary and should keep the Feds from raising rates further.  

Both the S&P and treasuries rallied on the expectation that this fall in earnings would prevent the Fed from going 50 basis points in the next meeting. 

For the first week of the year, S&P rallied 1.5% and the Nasdaq rallied 1%.
Here are the closing levels on Friday, 6th January 2023:

 Last Change %Change 
Dow Jones 33,630.61. +700.53 +2.13% 
S&P 500 3,895.08    +86.98. +2.28% 
Nasdaq Comp 10,569.29. +264.05. +2.56% 
US 10Y 3.56%   
VIX 21.13 -1.27 -5.92% 

Looks like the volatility from last year has spilled over to this year.  

The markets looked like they were closing the week lower but turned around after the jobs report started the year on a positive note.  

We all needed some positive price action after the horrible year we had in 2022. 

Going back to the price action after the jobs report, it looks like the markets are trying to tell the Fed what to do. The message is you have done enough, inflation is coming down and you should stop now so that we can have a soft landing. 

I wonder if the Feds feel the same way.  

The fear is that they keep saying that they will not stop until inflation is clearly under control. Hence, one number may not influence them.

It still rings in my head that they are willing to over-tighten rather than let inflation go out of control. A 5% terminal rate is still a probability. 

Let’s hope that we have more data to suggest that inflation is coming down fast enough to change the Fed’s course. 

The price action suggests that we may go higher and if we get signs of a less hawkish Fed, we could see the start of a big rally in markets. 

The risk is that the Feds have a different view like higher or tighter employment may lead to inflationary pressures. More people hired means more people spending hence more price pressures. 

Another risk is the upcoming earnings for companies. Many analysts are suggesting that earnings will be poor, and this will have a negative impact on prices. 

Source: CBOE, Bloomberg

This commentary is written by James Gomes
James has been in the finance industry for over 30 years and most recently worked for a large U.S. bank for more than 20 years.

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