US stocks gained for the second straight week after the Federal Reserve chair signalled the central bank would slow down its monetary tightening.
The benchmark S&P 500 index rose 1.1 per cent in the week, despite slipping 0.1 per cent on Friday after hotter than expected US jobs numbers added to pressure on the Fed to maintain its tough stance on inflation. The tech-heavy Nasdaq Composite added 2.1 per cent in the week, and declined 0.2 per cent in the final session.
Both indices had climbed sharply on Wednesday after Fed chair Jay Powell dropped a strong hint that the central bank would slow its interest rate rises later this month.
Hopes of an early Fed “pivot” on inflation were dented on Friday, however, when data showed US non-farm employment increased 263,000 last month, far higher than the 200,000 rise forecast by economists polled by Reuters. October’s increase was also revised higher to 284,000, from the 261,000 initially reported. The unemployment rate was unchanged at 3.7 per cent.
Investors took the better news for workers as bad news for markets. “A 0.75 percentage point rise in December has re-entered the debate,” said Steve Blitz, chief US economist at TS Lombard, referring to a jump in expectations for a 0.5 percentage point Fed rise that followed Powell’s speech on Wednesday.
“These are extraordinary numbers for this point in the cycle,” Blitz added. “The economy remains strong, demand for labour remains strong and we are nowhere near having established a softness in the economy that’s going to deliver a deceleration to the base inflation rate.”
Trading in futures markets showed investors think the Fed’s main policy rate will peak just below 5 per cent in June 2023, up about 0.1 percentage points from before November’s jobs data came out.
“The pace of US hiring alongside other measures of labour market activity such as vacancies and wage growth remain too high for the Fed’s liking,” said Hussain Mehdi, strategist at HSBC Asset Management.
“With this in mind and amid broader US economic resilience and sticky core inflation, we think speculation of a Fed pause as soon as the January-February meeting is unjustified.”
The yield on the two-year Treasury, which is sensitive to interest rate expectations, rose 0.02 percentage points to 4.27 per cent as prices of the security fell.
European stocks were muted, with the regional Stoxx 600 falling 0.2 per cent and London’s FTSE 100 closing flat. In Asia, Hong Kong’s Hang Seng index fell 0.3 per cent and China’s CSI lost 0.6 per cent.