The first week of the month means US employment data in the form of Non-farm payrolls (NFP). Employment data has been key as Fed chairman Jerome Powell last year told markets that the robust and strong labor market does not show signs of a recession or a slowing economy. Ever since then, traders have been very keen on NFP data, and many asset classes make big moves on data day.
Today is a good example:
Strong price action with the Dow Jones up 500 points in early trading.
The December nonfarm payrolls report showed that the U.S. economy added 223,000 jobs last month, slightly higher than the expected 200,000 jobs economists polled by the Dow Jones expected.
At first glance, you would think that this would lead to a market sell off. Why? Well with jobs data coming in higher than expected, the labor market still does not show signs of a slowing economy. This would mean the Fed will definitely raise rates in February and possibly remain hawkish going forward.
However, one data point is getting the stock markets very excited.
Wages grew slower than anticipated, increasing 0.3% on the month where economists expected 0.4%. Believe it or not, but this 0.1% has got stock markets soaring. With wage growth slowing, the markets see this as a sign that inflation is turning.
“All investors care about is that the data suggests inflation is moving towards the Fed’s target,” said Michael Arone, chief investment strategist at State Street Global Advisors. “That’s all investors care about and average hourly earnings suggest inflation continues to slow. They are excited about that.”
But perhaps the markets are overreacting?
“There is nothing within the release that would imply it’s anything other than a strong jobs report with moderating wage pressure,” Ian Lyngen, BMO’s head of U.S. rates, said in a note. “As a result, we’ll argue the 25 bp vs. 50 bp rate hike debate now comes down to next week’s CPI print.”
The US Dollar broke out yesterday but this breakout will be nullified if the dollar closes lower today. It is taking a hit post NFP, and I personally will be keeping a close eye on this chart near the end of the trading day.
Gold and other dollar pairs are rising. $1820 remains the major support which is holding.
Perhaps the most positive sign for stock markets is the action in the bond markets. Both the 2 and the 10 year yield are dropping hard. Signs that the markets are expecting a low rate hike from the Fed next month and a soon to pause Fed.
In Market Moment articles, I have said that US stock markets have been ranging and we have been waiting for a breakout or breakdown. The bias has been to the downside.
With the NFP data, markets are popping and the Dow Jones is actually retesting its major resistance zone. I show the Dow because the Nasdaq and the S&P 500 still have work to do, however one can argue the Nasdaq is bouncing and holding support.
Today’s close will be crucial to the markets. If we see the Dow confirm a close above this resistance and we see the dollar remain weak throughout the trading day, we will definitely have a strong case for a stock market turn.