Here are the takeaways from today’s Morning Brief. Sign up to receive the following in your inbox each morning:
September’s better-than-expected jobs report puts an exclamation point on a trend that has continued for much of the past two months.
US growth data is surprisingly upbeat again.
“Forget about soft landings. They probably won’t land,” Steve Sosnick, chief market strategist at Interactive Brokers, told Yahoo Finance. “Maybe that’s what this jobs report is telling us.”
This should all feel a little familiar to investors who have been closely following economic trends over the past few years. While the consensus thought the U.S. economy was finally slowing to the point where it needed support from the Federal Reserve, data suggests otherwise. Concerns are growing about a “hard landing,” in which the Fed’s restrictive interest rates cause the economy to stagnate, and discussions are quickly shifting to a “no landing,” in which the economy continues to grow and inflation risks resurface.
This brings to mind the defining phrase for the surprisingly strong 2023 economy, and all the caveats that come with it.
Indeed, we would come back again. Let’s go back to the days when the economy was strong, the Fed was cutting interest rates, and there was a lot of talk about stock market strength. Back when good economic news was “good news” for stocks.
But it’s a delicate balance. A strong situation could mean we see another round of good news that could be seen as a harbinger of a recovery in inflation. As our chart of the day shows, there have been plenty of moments in the last year alone where the market was hoping for data to subside. Investors worried that inflation will spike again and that interest rates will remain higher for longer than originally expected may be cheered by weaker-than-expected data.
The market appears to be grappling with what the shift in narrative means. The S&P 500 initially rose nearly 1% on Friday after the jobs report, but fell nearly 1% on Monday. This comes as the 10-year Treasury yield (^TNX) has risen about 20 basis points in the past two sessions, topping 4% for the first time since August.
This movement in yields is a sign of how market participants are now adjusting to expect the Fed to cut rates less quickly as the economy remains strong. A week ago, investors were pricing in a 34% chance that the Fed would cut interest rates by another 0.5 percentage point in November, according to the CME FedWatch tool. As of Monday, investors were not pricing in the possibility of a significant rate cut, instead pegging a 15% chance that the Fed would not move rates at all.
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For now, this seems acceptable to stock investors. More positive economic news could be welcomed by investors “as long as inflation is contained,” said Oson Kwon, U.S. and Canadian equity strategist at Bank of America. At some point, however, the move toward higher yields could weigh on investors’ risk appetite in the stock market.
“If indicators continue to improve, long-term interest rates and commodity prices are likely to trend higher, and if they don’t (earnings per share), stock prices will likely decline. It could put a strain on the.”
Sosnick said the current economic climate makes for a “tough situation” for those hoping for further rate cuts over the next 12 months (yes, we’re looking at you, prospective homebuyers).
But overall, this is an example of seeing the forest through the trees. The economy is doing better than anyone expected, so less interest rate cuts aren’t a bad thing. If asked to choose between further rate cuts and a better economy, Sosnick said, “I would always choose the better economy.”
He added: “We should always be looking for a stronger economy, because that’s what really drives stock prices.”
So while much of the economic narrative may be coming back, the framework of supporting good data to drive corporate interests has never gone away.
Fans cheer as the United States defeats France 98-87 to win the gold medal during a men’s basketball game at Bercy Arena during the 2024 Paris Olympics in Paris, Saturday, August 10, 2024. increase. (Keith Birmingham/MediaNews Group/Pasadena Star-News via Getty Images) (MediaNews Group/Pasadena Star-News via Getty Images via Getty Images)
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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