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September’s better-than-expected jobs report put an exclamation point on a trend that has been going on for almost two months now.
The American growth figures are again surprisingly positive.
“Forget the soft landing, we may not have a landing,” Interactive Brokers chief strategist Steve Sosnick told Yahoo Finance. “That’s what this jobs report might want to tell us.”
For investors who have been closely following the economic story in recent years, this should all feel a little familiar. Just when the consensus believed that the US economy was finally slowing to the point where it needed help from the Federal Reserve, the data says otherwise. Escalating fears of a “hard landing,” where the Fed’s restrictive interest rates send the economy into a tailspin, have quickly turned to talk of a “no landing,” where the economy continues to grow and inflation risks reemerge .
This is reminiscent of the defining phrase of the surprisingly strong economy of 2023 and all the caveats that come with it.
We are indeed again so back. Back to a time marked by calls for strength in the stock market, as the Fed cuts rates while the economy remains on solid footing. Back to a time when good economic news is ‘good news’ for stocks.
But it’s a delicate balance. Too much strength could mean that good news is once again presented as the harbinger of an inflation recovery. As our Daily Chart shows, there have been plenty of times in the past year alone when markets are hungry for data to cool down. Sometimes weaker-than-expected data is welcomed by investors who fear another inflation spike and interest rates staying higher for longer than initially hoped.
The markets appear to be struggling with what the narrative shift means. After initially rising nearly 1% on Friday after the jobs report, the S&P 500 fell nearly 1% on Monday. This comes as 10-year Treasury yields (^TNX) have added about 20 basis points over the past two sessions, crossing the 4% mark for the first time since August.
This move in rates shows how market participants are now adjusting to expect fewer rate cuts from the Fed as the economy remains stable. A week ago, investors were pricing in a 34% chance that the Fed would cut rates by another half a percentage point in November, according to the CME FedWatch Tool. As of Monday, investors no longer considered the chance of a massive cut, instead giving them a 15% chance that the Fed would not move rates at all.
For now, this seems acceptable to equity investors. Bank of America U.S. and Canadian equity strategist Ohsung Kwon noted that investors could welcome further good economic news “as long as inflation remains under control.” At some point, however, the rise in yields could weigh on investors’ risk appetite in the stock market.
“If the data continues to improve, long-term interest rates and commodity prices are likely to rise, which could put pressure on stocks without earnings per share,” Michael Kantrowitz, chief investment strategist at Piper Sandler, wrote in a note to clients.
Sosnick said the current economic backdrop creates a “tough situation” for anyone hoping for more rate cuts in the next 12 months (yes, we’re looking at you, potential homebuyers).
But on balance, this is an example of seeing the forest for the trees. Fewer interest rate cuts because the economy is doing better than everyone thought is not a bad thing. When asked to choose between more rate cuts or a better economy, Sosnick said he will “always choose the stronger economy.”
He added: “We should always be looking for a stronger economy because that’s really what drives stock prices.”
So while there could still be a lot of things going on about the economic story backthat framework of looking for good data to boost corporate profits has never disappeared.
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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