Market Watch
U.S. stocks gain as investors look to extend ‘soft landing’ rally
Jamie Chisholm
Last Updated: Jan. 9, 2023 at 9:40 a.m. ET
What’s driving markets
The first full week of trading for the new year started on a positive note as traders look to extend a big surge on Friday, when jobs and services data raised hopes the Federal Reserve can soon stop raising interest rates and the U.S. economy can avoid a hard landing.
The
nonfarm payrolls report showed a healthy pace of job creation and an unemployment rate of just 3.5%. But it also showed a slowing in wage growth, potentially easing pressure on service sector inflation, an area of price pressure that the Fed is keenly eyeing as it tightens monetary policy.
Indeed, an ISM survey of service sector activity illustrated how the Fed’s rate rises — 4.25 percentage points of hikes since March — already seem to be negatively impacting the economy.
Investors were thus emboldened by hopes the Fed could soon stop increasing borrowing costs and that any economic downturn will not be so severe that it badly impacts company earnings.
“On the back of ISM and payrolls, investors immediately moved to price in a less aggressive pace of rate hikes from the Federal Reserve. For instance, futures pricing for the end-2023 rate came down by -10.3bps over the week (-19.0bps on Friday) to 4.48%,” noted Jim Reid, strategist at Deutsche Bank.
“That was a big catalyst for risk assets,” allowing major indexes to turn positive for the week while Treasury yields fell sharply, he said.
Ipek Ozkardeskaya, senior analyst at Swissquote Bank, said: “The Fed is not looking to push the U.S. economy into recession for fun, it wants to see the jobs market tighter because, in theory, a tighter jobs market should help ease inflation.”
“But if inflationary pressures ease with little negative impact on jobs, that’s what we call the Goldilocks scenario: a soft-landing from the ultra-supportive monetary policy euphoria, easing inflation without too much pain on jobs market. In other words, it’s jackpot for the Fed!” she added.
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