A combination of positive economic data rocked markets on Friday, with stocks closing higher on expectations that the US will avoid a recession; yet, bond traders were compelled to reduce their bets on rate cuts in 2024, sending rates surging.
While economic strength makes many investors less concerned about a hard landing, it also implies the Federal Reserve may have to keep rates higher for longer. For Treasuries, this means an unwinding of the massive dovish trade that pointed to a Fed pivot as early as March. For equities, jobs and consumer resilience bode well for Corporate America.
Following a slew of figures pointing to a slowdown in the labour market, Friday's jobs report showed an unexpected pickup: nonfarm payrolls increased 199,000 last month, the unemployment rate fell to 3.7%, and monthly wage growth exceeded expectations. A separate report showed that US consumer sentiment rebounded sharply in early December, outperforming all forecasts, as households cut their year-ahead inflation expectations by the most in 22 years.
The S&P 500 gained for the sixth week in a row, its longest winning streak since November 2019. Wall Street's "fear gauge," the VIX, hovered near pre-pandemic levels. US two-year yields rose 12 basis points to 4.72%. Swap contracts now show a 40% probability of a March rate cut, down from more than 50% prior to the economic data.
Softening inflation and employment data in the last month convinced investors that the Fed is done raising interest rates, igniting bets that at least 125 basis points of easing were on the way over the next 12 months, which traders reduced to approximately 110 basis points of easing.