Major U.S. equity indices started the new year positively, with the Dow, Nasdaq 100, and S&P 500 all posting weekly gains. Much of last week’s strength came on Friday after the most recent employment data release.
Strong Jobs Report
Nonfarm payrolls rose by 223,000 in December, beating the Dow Jones estimate of 200,000. The labor market continues to show strength, even with the Federal Reserve hiking rates to slow economic growth. Notable sector strength existed in the healthcare, construction, and hospitality sectors.
Wage growth, however, showed some momentum loss in the recent reading, showing average hourly earnings up 4.6% from one year ago. This was below estimates of 5.0%.
In addition, the unemployment rate fell from 3.7% to 3.5%, also better than expectations, tied for the lowest in 50 years.
Treasury Yields Fall
10-year note yields declined last week, as Friday’s jobs report showed signs of some wage growth slowdown. Investor inflation concerns seemed to decline on this data. Ultimately, 10-year note yields settled last week at 3.568%, sharply lower from the previous week’s close of 3.88%.
Shorter-term Treasury yields also fell last week.
Fed Meeting Minutes
Before Friday’s market rally on the jobs report, there was a different tone set courtesy of the Fed December meeting minutes released on Wednesday.
The meeting minutes indicated that the Fed sees higher rates for “some time” ahead. They noted: “Participants generally observed that a restrictive policy stance would need to be maintained until the incoming data provided confidence that inflation was on a sustained downward path to 2 percent, which was likely to take some time. In view of the persistent and unacceptably high level of inflation, several participants commented that historical experience cautioned against prematurely loosening monetary policy.”
The hawkish comments sent markets lower midweek prior to Friday’s rally on the jobs report.
Inflation Data on Tap
Once again, we are due for the monthly check-in on inflation via the Consumer Price Index (CPI). For the January release of December data, preliminary estimates are for a 6.5% year-over-year rise in CPI.
The last monthly reading showed a 7.1% year-over-year rise, and many market watchers think this week’s CPI could be the deciding factor between a 25-basis-point or 50-basis-point rate hike at the February Fed meeting.
As of Monday morning, the CME FedWatch Tool shows a 77.2% chance for a 25-basis-point hike and a 22.8% chance of a 50-basis-point hike.
Last week was somewhat of a tug-of-war via hawkish Fed meeting minutes midweek and the healthy jobs report showing some signs of a wage growth slowdown.
The bond yield decline on the heels of solid nonfarm payroll data paints a picture of improving investor sentiment, even with the Fed minutes coming out on the hawkish side.
This week’s economic data calendar features CPI on Thursday and University of Michigan consumer sentiment data on Friday. Broader sentiment could improve if CPI comes in near or below expectations, as this could increase the chances of a 25-basis-point hike versus a 50-basis-point-hike at the next Fed meeting.
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