Stock Market Pops After Latest Jobs Report, But New Data Shows Key Sectors Contracting

On Friday morning, the U.S. Labor Department released the latest jobs report for the month of December, and the stock market took the news positively.

The U.S. added 223,000 jobs last month, above average economist estimates of 200,000 jobs. The unemployment rate is at 3.5%, below estimates of 3.7%.

While job creation has slowed down slightly from a monthly rate of around 260,000 for September, October and November, the December figure was still relatively strong.

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The consequences of these results could be both good and bad for the private sector.

While a strong job market means more spending, it also gave the Federal Reserve a clear signal that its measures to raise interest rates were not taking a big toll on people’s daily lives, allowing for extra wiggle room to continue to raise the federal funds rate even higher in order to wind down inflation.

The hikes are likely to become milder in 2023, as the Fed aims for a “soft landing” approach: hitting the dual goal of bringing inflation down while not entering into a full-blown recession.

“The Fed will likely further downshift the pace of rate hikes and will likely increase rates by 0.25% at the next meeting as inflationary pressures abate,” said Jeffrey Roach, chief economist for LPL Financial.

Bill Adams, chief economist for Comerica Bank agreed the Fed would likely raise interest rates by 0.25% on Feb. 1, as inflation continued on a downward path.

“If the good news keeps coming on inflation, the Fed could pivot to rate cuts in late 2023. But December’s strong jobs report shows that the pivot is not just around the corner,” said Adams.

Sector Breakdown

A new report by the Institute of Supply Management showed that in spite of the jobs report, the U.S. economy had entered a contraction period.

“The manufacturing sector contracted in December for the second consecutive month following a 29-month period of growth,” while “the services sector contracted after 30 consecutive months of growth,” said the ISM.

The three major indices responded positively to the new jobs data.

The S&P 500 picked up on Friday after the official figures were released, regaining the losses of Thursday as anticipation added volatility to the market gauge. The index was up 1.67% on Friday and 1.11% this week.

The Nasdaq Composite was up 1.57% on Friday, while the Dow Jones recovered by 1.6%

Tech stocks responded positively as well. The NASDAQ 100 Technology Sector Index was up 2% on Friday. Amazon.com, Inc. AMZN is up by 1.35%. Meta Platforms Inc. META is up by 1.55%. Microsoft Corp. MSFT and Alphabet GOOG are close to the same price as yesterday.

So-called defensive sectors, which tend to perform well during economic downturns, are also having a good run on Friday. The Vanguard Consumer Staples Index Fund ETF VDC is up 2.46% while the Consumer Staples Select Sector SPDR ETF XLP is up 2.55%.

Real estate, another defensive sector, is also thriving. The Dow Jones U.S. Real Estate Index is up 2.07% and the S&P 500 Real Estate is up 2.11%.

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