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Will the Surprisingly Strong Jobs Figure Alter the Fed's Approach?

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“Don’t fight the Fed.”

We’ve heard this phrase uttered repeatedly throughout the last year. And while we certainly do not want to fight the Fed, the tide has turned in recent months, as markets have begun to anticipate an eventual pause in the Fed’s aggressive interest-rate hiking scheme.

Throughout it all, the jobs market has remained extremely resilient. The U.S. Bureau of Labor Statistics reported this morning that employers added 517,000 jobs last month, shattering expectations of 187,000. The unemployment rate fell to just 3.4% in January – the lowest dating back to 1969, trending below the depths prior to the pandemic.

Image Source: StockCharts

If a recession is coming, the labor market certainly hasn’t received the message. And while we may see a notable slowing in jobs creation in the near future, we simply don’t have that in hand as of yet.

At the onset, traders digested the astonishing jobs figure negatively, as the better-than-expected number enhanced worries that the Federal Reserve would continue hiking rates and keep them there longer. The initial reaction caused futures to plunge in pre-market trading, with the Nasdaq down more than 2% in the early going. Yet in line with recent bullish activity, stocks have clawed their way back and are now hovering between slight gains and losses – once again displaying their resilience.

The Fed announced the highly anticipated 25-basis point hike on Wednesday afternoon, moving its policy rate to the highest level since October 2007. Officials noted that minor increases in the federal funds rate are warranted moving forward in order to keep inflation measures tame.

But in an outright dovish speech following the Fed’s two-day meeting, Powell noted inflation pressures are moderating, even going as far as saying that the “disinflationary process has started.” Markets have since applauded the commentary, as it stands in stark contrast to the hawkish stance Powell has taken in an effort to stave off a 40-year high in inflation last year.

In essence, we have two competing chronicles. The jobs number doesn’t align all that well with many bearish narratives (upcoming job losses followed by a mild recession). On the other hand, the surprising jobs data also doesn’t match up well with bullish hopes of a pause in rate hikes from the Fed.

Given this, what is the most likely outcome we can expect from Powell and company?

Despite inflation coming down, average hourly earnings in the U.S. increased 4.4% year-over-year last month, which marked the slowest growth since August of 2021. It was the 22nd consecutive month where inflation outpaced wage growth. This relationship translates into a decline in the standard of living for the average American worker, and serves as a chief determinant as to why the Fed will likely continue hiking in small amounts in the near future.

However, the market is forward-looking, and has taken this into account. Slightly higher rates haven’t deterred buying pressure this year. Tech stocks have been leading the charge, rallying from oversold levels following last year’s bear market. Numerous stocks are breaking out to the upside, with more stocks participating in this rally than at any point over the last year.

As we can see below, as the last bull market was nearing its end, the percentage stocks in the Nasdaq (COMPX - Free Report) above their 200-day moving average was falling while the index was hitting new highs. It was a clear indication that things were deteriorating and that the bull market as coming to an end.

Image Source: StockCharts

Now we’re getting the opposite and as the Nasdaq was hitting lower lows into December, look what was happening to percentage of stocks trading above their 200-day average. The trend has reversed to higher highs. It’s the opposite of 2021 when large-cap stocks were holding up the major indices; now small and mid-caps are beginning to lead, and technology has joined suit.

The markets are telling us to factor in better-than-expected outcomes this year. A few more small increases in interest rates are likely, but markets have largely taken these into consideration. While we don’t want to fight the Fed, we also need to pay heed to what the market is telling us. And if we listen closely, we see that stocks are likely poised for more growth ahead in 2023.

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