The American Economy Is Too Strong, According to the Stock Market

• The U.S. economy added 256,000 jobs in December, far exceeding the 153,000 estimate, signaling economic strength but delaying potential interest rate cuts.

• The 10-year Treasury yield rose to 4.76%, its highest since October 2023, as inflation remains above the Fed’s 2% target.

• The upcoming CPI report on Wednesday could shift market sentiment, with investors watching closely for signs of progress toward the Fed's inflation goals.

  
  

Why A Strong Jobs Report Is Bringing Down Markets

Stocks fell sharply after the jobs report on Friday proved that the American economy is in much better shape than expected. By market close, the S&P 500 was 1.5% lower, and the Nasdaq fell 1.6%. The Benjamin Fund and MoneyTalk Fund were both down 1.4%.

The economy added 256,000 jobs in December, more than 100,000 jobs above the consensus estimate of 153,000. While the report proves the American economy is in strong shape, it also signals that the Federal Reserve may not need to act as quickly to bring down interest rates.

According to CME FedWatch, a tool that tracks investor sentiment over the probability of interest rate movements, investors are only pricing in a 2.7% chance of a rate cut at the next Fed meeting set to take place on January 29th. The 10-year Treasury yield now sits at 4.76%, its highest level since October of 2023. Historically, a rising 10-year yield has served as a indicator the market expects oncoming inflation.

Unemployment and Inflation Trends

Jerome Powell, chair of the Federal Open Market Committee (the committee that decides federal funds rates), has stated that there are two main factors in the committee's decisions at each meeting: employment and inflation.

While jobs have remained stable, with unemployment unexpectedly falling from 4.2% to 4.1%, inflation has proven to be more stubborn. In November, the Consumer Price Index showed a 2.7% increase in prices over 12 months, continuing a trend of inflation inching away from the FOMC’s 2% target.

What To Watch For Next Week

The next CPI report is set to release Wednesday, and it will be the highlight of stock market news as investors closely watch to see if the results are favorable. Currently, the Fed has set estimates of 2.2%, but those estimates were made back in September, and since then CPI has moved in the opposite direction.

If the results show CPI is once again moving toward FOMC targets, it could reverse the yield movements spurred by the strong jobs report. Conversely, if inflation remains stagnant or even edges upward, the market could react sharply as rate cut projections move further out into 2024.