Economic data was highlighted by a better-than-expected jobs report on Friday.
- Non-farm payrolls increased by 253,000.
- This has beaten consensus expectations for a record thirteenth consecutive month.
- The unemployment rate fell to 3.4%
These results shouldn’t come as a surprise given the strong ADP report released a couple days earlier and the large amount of smoothing embedded in the payrolls report. At times this would be bad for the market, but with inflation coming down the market rallied strongly on the day. Better economic data that reduces recession probabilities is likely going to initially be favorable for stocks. This is a pivot from when inflation was extremely elevated and strong growth meant a more restrictive Fed.
The Consumer Price Index (CPI) came in-line with expectations as headline inflation was up 4.9% versus the prior year and core CPI was up 5.5%. Core CPI has remained sticky with monthly readings of 0.4% whereas 0.2% is needed for annualized inflation of 2%. The Atlanta Fed Core Sticky CPI Excluding Shelter is at 3.6% on a three-month annualized basis and more supportive of lower inflation outlooks. We now have the Federal Funds rate above the CPI rate, which occurred in previous cycles and gives the Fed room to pause. Other Fed officials this week suggested rates may still need to go higher. Given these various inflation measures, it is possible the Fed’s reaction function to incoming data becomes less predictable.