Investors were nervous that the jobs news on Friday would be stronger than expected and push the Fed to raise rates by a half percentage point at its next meeting on Feb. 1, but other, weaker data helped counter those fears.
Nonfarm payrolls did come in higher than expected, and the household unemployment rate fell to just 3.5%, but average hourly earnings were lower than expected, which offset the employment growth. The payroll numbers were followed by a very weak ISM non-manufacturing report, which sent the indexes back up and helped to keep bids in place all day.
The most important thing about this economic news is that it pushed the odds of a quarter-percentage point hike up to 74%. One month ago, the chances were just 38%, and there was a 62% chance of a hike of 0.5% or more.
The Fed remains quite cautious and does not want to sound optimistic about how well its policy controls inflation. It would not be a surprise to see some hawkish comments from various Fed members next week as they struggle to keep expectations very low.
Investors were not well positioned for an upside move today, which helped to create a little short-squeeze and some fear of missing out. Breadth was better than four-to-one negative, but we have few new 12-month lows or highs as we are in a trading range right now.
From the technical standpoint, key support levels have held, and there is more room at the top of the current trading range. Some further upside next week would not be surprising, but there is high risk of hawkish Fed comments and poor data.
Earnings season is starting soon, and that should trigger some concern about forward estimates. There are many concerns about a recession, but it may not be reflected in current earnings expectations.
Have a great weekend. I'll see you on Monday.
