Labor and Inflation Data Generate Opposing Market Reactions
Photo Credit: Yohan Marion, Unsplash
Weekly Market Recap for January 17th
This week, there was limited dispersion across markets for the second consecutive week despite the volatile response to economic data. The Russell 2000 slightly outperformed the S&P 500, while the Nasdaq and international stocks were flat. Underneath the surface, factor trends saw Momentum, Value, and Equal Weight outperform the S&P 500. Notably, the Magnificent 7 underperformed, dragging down the Growth factor and Tech sector. Sectors experienced significant dispersion. Energy gained +5.8% as oil prices rose, with the Material and Industrial sectors close behind. Bonds ended the week with modest gains despite the round trip in Treasury yields.
S&P 500 Index (Last 12 Months)
S&P 500 Technical Composite (Last 24 Months)
Bull Bear Market Gauge
Bull Bear Market Narrative
US Market Economic Cycle
Labor Market Remains Strong But Tight
The December jobs report revealed a solid labor market that is still relatively tight. Unemployment declined from 4.2% to 4.1%, matching the lowest levels since June 2024. The economy added 256,000 jobs, surpassing 200,000 for the third time in four months. Hiring was broad across industries, a welcome change after Health Care and Government led in 2024. A deeper analysis shows the labor market’s resilience and indicates that last year’s concerns about rising unemployment were misguided. Unemployment fell across genders, and all age groups and the number of unemployed individuals declined across all durations, from short-term unemployment of fewer than five weeks to long-term joblessness exceeding 27 weeks. Despite the positive headlines, there is reason to be concerned: the labor market is still tighter than before the pandemic. The Not in Labor Force category remains near a post-pandemic high as workers retire early. This dynamic has caused the labor participation rate to drop to a 12-month low, keeping the labor market tighter than it would otherwise be and putting upward pressure on wages. Although average hourly earnings growth has cooled compared to recent years, it remains near 4%, significantly above the pre-pandemic trend.
Unemployment Declines to 4.1% in December
Job Growth Surpasses 200,000
Average Hourly Earnings Growth Remains Elevated
Inflation Remains Elevated But Is Not Accelerating
Headline Consumer Price Index (CPI) rose by +0.4% in December, up from November's +0.3% and the highest since March 2024. The index for Energy rose by +2.6%, accounting for over 40% of the monthly increase. On a year-over-year basis, headline CPI rose by +2.9%, up from last month's +2.7% and the highest since July 2024. While headline CPI came in slightly above consensus, core CPI was somewhat better than expected. Core CPI rose by +0.2% after rising +0.3% for four consecutive months. The chart below highlights the recent divergence between headline and core CPI. Over the past three months, core CPI rose at a +3.3% annualized pace, down from last month's +3.7% and a 3-month low. However, headline CPI rose at a +3.9% annualized pace over the same period, the highest since April 2024. While the CPI report shows that inflation remains above the Fed's 2% target, the market remains largely unfazed. The slight uptick in CPI does not alter the path towards 2% inflation, particularly with the Producer Price Index (PPI) coming in better than expected this week. Headline PPI rose by +0.2% in December, slightly below expectations and down from last month's +0.4%. Core PPI, excluding food, Energy, and trade, rose by +0.1% for a second month, among the lowest readings since late 2023. The market's take: inflation is not decreasing as rapidly as hoped, but it is not accelerating either.
Headline CPI Rises, While Core CPI Edges Lower
Market Reaction Creates Volatility
The reaction in financial markets to the jobs and inflation reports was the opposite. Despite strong job growth and falling unemployment, the jobs report elicited a sharply negative market response as investors focused on its monetary policy implications. Treasury yields spiked as investors lowered their rate cut expectations, and the US 10-year Treasury yield rose to 4.80%, its highest level since November 2023. Stocks sold off on concerns that the labor market’s resiliency would lead to fewer rate cuts and potentially rate hikes if inflation reaccelerated. However, this week’s inflation reports unwound some job report reactions. The US 10-year Treasury yield declined to 4.60%, and the S&P 500 recovered its losses. The inflation data reinforced the likelihood that the Fed will maintain its current policy view, with the potential for cuts later in the year if inflation cools further. We expect the volatility to continue until the market and the Fed better understand underlying inflation and labor market dynamics.
Look Ahead
Next week’s economic calendar is relatively quiet, with the next big data point being the Q4 GDP report on Thursday, 1/30. There is also an FOMC meeting two days prior, on 1/28-1/29. Given this week’s reaction to inflation and labor data, the final days of January could bring heightened volatility. This potential for volatility comes with the stock market sitting at an important inflection point just beneath the 50-day moving average, with the S&P 500 being technically oversold since mid-December. The resolution of these technical dynamics will be crucial in determining the market’s next move.
Important Disclosures
This material is provided for general and educational purposes only and is not investment advice. Your investments should correspond to your financial needs, goals, and risk tolerance. Please consult an investment professional before making any investment or financial decisions or purchasing any financial, securities, or investment-related service or product, including any investment product or service described in these materials.
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