By William Watts
Corporate profits more important than rate cuts: CIO
Another round of red-hot U.S. jobs data Friday put a deeper chill on expectations the Federal Reserve will begin in June to deliver a series of interest rate cuts in the near future, but stock-market investors seem relatively okay with that.
After all, a strong economy and healthy consumer are crucial to a bull market for stocks. If expectations for rate cuts are being scaled back because the economy looks healthy but not overheating, then investors can remain optimistic about earnings growth.
“To the extent that consumer spending and corporate profits are more important to investors than how soon (and how many times) the Fed will cut rates, then stock prices can move higher on this report,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance in Charlotte, North Carolina, in a note.
The Labor Department said the U.S. economy created 303,000 new jobs in March. Economists surveyed by the Wall Street Journal had forecast a rise of 200,000. The unemployment rate slipped back to 3.8% from 3.9%, while average hourly earnings slowed to 4.1% year-over-year from 4.3% in February.
March jobs report: U.S. adds 303,000 positions in yet another blowout showing
Expectations for a quarter-percentage point rate cut by the Federal Reserve in June faded somewhat after the data. Fed-funds futures priced in a better-than-41% probability policy will remain on hold at the central bank’s June meeting, up from 34.2% on Thursday but just under 40% a week ago.
Investors and analysts said expectations the Fed will deliver three, quarter-point cuts by year-end are likely to fade if the economy continues to run strong and, in particular, if inflation fails to resume a downtrend toward the Fed’s 2% target.
Stocks were trading higher Friday morning, with the Dow Jones Industrial Average DJIA up around 134 points, or 0.3%, while the S&P 500 SPX rose 0.7% and the Nasdaq Composite COMP gained 0.9%. Equities are on track for weekly declines, however, after the Dow and S&P 500 closed out last week and the first quarter at record highs.
Stock Market Today: Dow builds on early gains following March jobs report
Treasury yields, which move opposite to price, rose. The yield on the 10-year note BX:TMUBMUSD10Y was up around 6 basis points near 4.364% but remained shy of the 2024 high near 4.43% set earlier this week.
The good news on jobs “is bad news for the bond market” because ” it makes the Fed’s propensity to cut sooner and more often less likely and we may not see the first rate cut until July,” Zaccarelli said.
The data serves to make Fed rate-cut forecasters “hot under the collar,” said Seema Shah, chief global strategist at Principal Asset Management, in emailed comments, with the report, at first sight, leaning against expectations for three cuts in 2024.
But the moderation in average hourly earnings was in line with expectations and, she noted, Fed Chair Jerome Powell has made clear in recent remarks that a strong labor market isn’t a concern if price pressures are moderating.
Next week’s March consumer price index reading will be “pivotal” for rate expectations, she said, but Friday’s jobs figures “should reassure markets that, if the Fed does not cut in June, it’s because the economy is still strong and earnings should remain in an upswing,” she wrote.
-William Watts
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04-05-24 1047ET
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