MANHATTAN (CN) — For Wall Street this week, relatively no news was bad news, as markets fell while still digesting last week’s jobs report and awaiting soon-to-be-released inflation data.
By the closing bell on Friday, the Dow Jones Industrial Average declined 57 points, while the S&P 500 lost just 46 points. The tech-heavy Nasdaq meanwhile fell 288 points for the week, mostly due to the inverted bond yield curve and continued hawkish comments by Federal Reserve officials during the middle of the week.
Investors may be pulling back after successive positive gains in equities, as they try to reassess the economy in advance of a raft of key economic data due next week.
“After a solid start to the year, stocks are consolidating some of their recent gains,” James Vogt at Tower Bridge Advisors wrote, pointing to the S&P 500 and Nasdaq both gaining about 18% since lows back in October. “This could certainly be the start of a new bull market, but it is unlikely to be this easy going forward.”
Perhaps most concerning is the fact that the Treasury yield curve — which marks the difference between short- and long-term bonds — is at its widest point since 1981 and is at odds with the relatively bullish equities market. The yield on 10-year Treasuries hit about 3.743% around the closing bell on Friday, while the 2-year Treasury yield hit 4.525%.
“One of these markets is wildly mispricing the future path on rates, [gross domestic product] and potential recession,” Vogt wrote, adding that extremely high-interest rates, still-elevated goods prices and dwindling savings accounts also typically precede a recession. “Momentum works until it doesn’t.”
Wall Street is still processing last week’s jobs report, which showed more than half a million jobs gained in January, far more than expected, with many hoping it is indicative of a “soft landing” with lower inflation and no recession.
“There was no single event that could explain the strength in private payrolls,” James Knightley, chief international economist at ING, wrote in an investor’s note earlier this week, noting that the 2.5 million jobs lost during in January 2023 is a figure on par with the 2 million to 3 million jobs that are lost every January.
“So essentially the story behind the strength in the payrolls number is fewer people being laid off rather than any meaningful increase in hiring,” Knightley wrote, adding that some small businesses may be “hoarding” workers for fear of not being able to fill those positions. “If it isn’t hoarding, then we should be braced for colder weather in February to mean seasonal layoffs have simply been delayed from January into February.”
In research put out this week by the Federal Reserve of St. Louis, a mismatch between available jobs and workers to fill those openings has existed since April 2021. As of December 2022, there were 170 million jobs available but just 165 million employees in the labor force. The last time such a mismatch existed was just before the Covid-19 pandemic struck the United States in February 2020.
On Friday, initial sentiment reads by the University of Michigan showed consumers somewhat more upbeat this month compared with last, rising to 66.4 from 64.9 in January. This is above the consensus forecast, and the current conditions index from the survey is now the highest it has been since December 2021.
However, respondents still note increased concerns about the unemployment rate increasing later in 2023, and long-term inflation concerns remain at 2.9% while consumers await further hints of what the Federal Reserve plans to do regarding interest rates.
“Improved consumer sentiment will likely reignite conversations about a softish landing,” said Jeffrey Roach, chief economist at LPL Financial. “The Fed still has work to do in squelching inflation, the economy is steadily slowing, yet conditions are stable enough for the economy to eke out growth this year.”
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