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Will Booming Jobs Put Fed on Hold? Treasury Yields Rise!

Job growth and consumer confidence is high, but will it create a new round of inflation?

Wow what a jobs report!  The employment report is a clear sign of the robust and dynamic U.S. economy, showing an addition of 353,000 jobs, which significantly surpassed the expected 185,000, presents a strong indicator of economic growth and strength of the labor market, defying many economists’ forecasts. The steadiness of the unemployment rate at 3.7% further underscores the resilience of the job market. This unexpected surge in job growth, coupled with rising consumer spending, paints a positive picture for corporate profitability and economic momentum.

However, this strength in the job market brings with it a caution regarding expectation of cuts in interest rates in the near term. The strong employment data suggests that the Federal Reserve may hold off on interest rate cuts to combat inflation from rising again, which in turn has led to an uptick in Treasury Yields, reflecting diminishing prospects for a rate reduction in the near term.  This was reiterated by Chairman Powell yesterday stating a March rate cut was probably off the table…the job market helps confirm the possibility of no cut in March!

In the earning news, quarterly earnings from Amazon and Meta have been impressive, with Meta even initiating a dividend policy. This performance, particularly within the “Magnificent 7” of the technology sector, highlights a divergence where Amazon and Meta have excelled, while others like Microsoft and Alphabet have lagged, and Apple, despite surpassing earnings expectations, faced stock performance issues tied to its operations in China.

The strong job growth, along with Amazon’s (and other companies) impressive financial results, reinforces confidence in the U.S consumer market. Yet, the threat of inflation growing again is a possibility, confirming the Fed’s position of “higher for longer”.  The Fed will want to cool this economy as it is very hot currently but with low inflation.  This environment calls for a strategic focus on companies showcasing strong earnings growth, as consumer confidence remains high but inflationary pressures persist, posing potential risks to economic stability. Earnings acceleration will be the focus! 

Given the current economic backdrop, the market’s appetite will likely lean towards companies that stand to benefit from consumer spending and can demonstrate tangible growth in earnings and product offerings.  While the threat of a recession appears low, the rapid market growth seen in 2023 should become more selective, favoring entities with solid fundamental growth factors. Investors are advised to keep a keen eye on such companies as they navigate through an economy that, despite its vigor, carries inherent inflationary challenges.

Key Points

  • Strong jobs report: The U.S. economy added a surprising 353,000 jobs in November, far exceeding expectations. The unemployment rate remained steady at 3.7%.
  • Positive consumer spending: Consumer spending is on the rise, which is good news for corporate profits.
  • Higher interest rates: The strong job market and concerns about inflation may lead to higher interest rates for a longer period.
  • Mixed earnings reports: Amazon and Meta reported strong earnings, while Microsoft and Alphabet reported weaker results. Apple also beat earnings expectations, but its stock price was impacted by concerns about its operations in China.
  • Market Focus is shifting to Earnings acceleration.  Quality growth will be important! 

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