In a remarkable week for Wall Street, the S&P 500 is poised to finish every trading day on a high note, gaining over 5%. This surge is fueled by growing confidence that the Federal Reserve’s interest rate hikes meant to combat inflation may be coming to an end. The latest jobs report added to this sentiment as it revealed that employers hired fewer workers last month than economists had anticipated, indicating a decrease in inflationary pressure.
The bond market saw Treasury yields drop immediately after the jobs report, relieving some of the pressure on Wall Street. The yield on the 10-year Treasury eased to 4.52%, down from 4.67% the previous day, and significantly lower than the 5% reached just last week.
This is a stark contrast from a week ago when Wall Street experienced a 10% decline from the year’s peak, putting it into correction territory due to the rapid surge in Treasury yields. These elevated yields were converging with the Fed’s interest rate, which had reached above 5.25%, its highest level since 2001.
Higher yields have the potential to slow the economy, depress asset prices, and create financial system vulnerabilities. The Fed initiated these measures intentionally to curb inflation, with a particular focus on moderating wage increases.
Friday’s job report provided some promising signs for the Fed, as average hourly earnings in October increased less than expected compared to September. However, this isn’t enough evidence for the Fed to make a decision on policy changes for December.
Nevertheless, the sharp decline in Treasury yields this week has raised concerns that it may negatively impact stock investors in the long term. Fed Chair Jerome Powell noted that if these elevated yields persist, it may eliminate the need for further rate hikes, potentially slowing the economy and curbing inflation on its own.
Despite the stock market’s optimism, there are lingering concerns about a potential recession, even though the current economic conditions are strong. A decelerating job market is precisely what investors were hoping for, as it might lead the Fed to pause its series of rate hikes initiated early last year.
As a result of falling yields, expectations for a rate cut by the Fed have been adjusted upward, potentially by the summer, which could boost financial markets.
While the world watches central banks closely, the Fed’s actions carry particular weight. Weak U.S. data remains the primary factor influencing global markets. Excitement over a potentially more accommodating Fed helped offset Apple’s decline, as it missed revenue forecasts for the last quarter of 2023.
Expedia Group reported stronger results for the latest quarter than expected and announced a share buyback of up to $5 billion, resulting in a 16.1% surge in its stock. Cardinal Health also rose by 7.9% after reporting better-than-expected profits.
Stocks in Europe and Asia also enjoyed gains, adding to the week’s positive momentum.
Featured Image: Unsplash @ Chenyu Guan
