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Blowout Jobs Report & Fed Interest Rates

U.S. stocks closed lower on Friday, 3rd February 2023, following the release of a surprising jobs report

Non-farm payrolls rose 517,000, way above the 188,000 that was estimated. 

The unemployment rate fell to its lowest since 1969, at 3.4%.

Average hourly earnings was up 0.3% from December and 4.4% from a year earlier. 

Other data released on Friday were the S&P global services PMI final 55.2 (50.6 est), S&P Global Composite PMI final 46.8 (46.6 est), ISM non-manufacturing PMI 55.2 (50.6 est), ISM non-manufacturing prices 67.8 (66 est) and ISM new orders 60.4 (47 est). 

The 2-Year note yield rallied 19 basis points to 4.29% while the 10-Year note yield rose 13 basis points to close at 3.52%. 

Stocks actually rose hard after the jobs data but eventually succumbed to selling in the afternoon session. 

For the week, the S&P gained 1.6%, the Nasdaq surged 3.3% but the Dow fell 0.3%. 

Here are the closing levels on Friday, 3rd February 2023: 

 Last Change %Change 
Dow Jones 33,926.01.   -127.93.   -0.38% 
S&P 500 4,136.48. -43.28. -1.04% 
Nasdaq Comp 12,006.96. -193.86. -1.59% 
US 10Y 3.52%   
VIX  18.33 -0.4 -2.14% 

On Wednesday, the Fed raised rates by 25 basis points which was widely expected. 

Jerome Powell, in the press conference after, said that interest rates would likely end up higher than investors expected, and he pushed back on cuts that markets had priced in for this year. 

As soon as he finished speaking, stocks and bonds rallied hard, ignoring everything he had said. 

Investors decided to make their own story that the Fed, will stop raising rates and cut rates later this year…. Unbelievable. 

The same sort of reaction happened immediately after the jobs data even though the data suggested that it could be inflationary and that the Feds may need to hike more and stay higher for longer. Unbelievable …again. 

Irrational exuberance is probably the best description. After a very strong start to the year, investors believe that this is the start of a bull market and nothing the Feds say or do can change their minds. 

I called for a big rally at the start of the year but now I think it’s time to take some profits and hedge the downside risk. 

The selling on Friday could be a wakeup call that all is not well for stock prices if the Fed goes higher and longer. The recent strong data poses an upside inflation risk and if the recent decline in inflation turns around it could get very nasty.  

Big tech earnings were also not great and posed another threat to stock prices. 

Even though it is possible that stock prices may go higher, it’s hard to recommend a buy with so many headwinds. If the bubble burst, it is going to be very painful. 

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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