By Herbert Lash and Naomi Rovnick
NEW YORK/LONDON (Reuters) -Bond prices and a gauge of global equity performance rose on Friday after a surprisingly strong U.S. employment report gave investors confidence the Federal Reserve can engineer a “soft landing” for the U.S. economy.
U.S. employers hired more workers than expected in December while raising wages at a solid clip, which prompted markets to dial back expectations the U.S. central bank would start cutting interest rates in March.
That outlook initially was viewed negatively and added to the New Year’s hangover for equity markets that had surged late last year.
But stocks on Wall Street rebounded, helping lift MSCI’s all-country world index 0.42% and prices of Treasuries, which move inversely to their yields, also rebounded.
The U.S. jobs report was “a sizable positive surprise that indicated the domestic economy continues to do well and expand,” said Tim Ghriskey, senior portfolio strategist at Ingalls & Snyder in New York.
“At least for now, it reversed the profit-taking that the market has experienced during this first week of the year.”
The Fed is hoping to drive inflation back down to its 2% target without triggering a recession or sharp rise in unemployment, a scenario dubbed the “soft landing” by policymakers and financial markets.
The yield on the benchmark 10-year note fell 1.1 basis points to 3.980% and the dollar index, a measure of the U.S. currency against six peers, slid 0.32%. The euro rose 0.29% to $1.0975.
On Wall Street, the Dow Jones Industrial Average rose 0.3%, the S&P 500 gained 0.65% and the Nasdaq Composite added 0.75%. In Europe, the pan-regional STOXX 600 index lost 0.14%. The blistering rally for equity markets at the end of 2023 was based on expectations that the Fed, alongside significant easing by the European Central Bank, would cut interest rates six times this year.
The monthly nonfarm payrolls report showed the U.S. economy added 216,000 new jobs in December. Economists polled by Reuters had expected a gain of 170,000.
The jobless rate held steady at 3.7%, down from most forecasters’ expectations for it to rise, prompting concerns for some investors that the Fed’s long battle against inflation may have further to run.
Future labor demand is very soft and every other piece of the unemployment report is pointing in a downward direction, said Joseph LaVorgna, chief U.S. economist at SMBC Nikko Securities in New York.
The number of private wage and salary workers has declined, overall aggregate hours, a proxy for GDP, haven’t grown for three months in a row and temporary employment has been down for 11 straight months, he said.
“You take the headline numbers, which are a little bit better than expected, and people are drawing the incorrect conclusion of the report is strong,” LaVorgna said.
Euro zone inflation data on Friday showed prices in the currency bloc rose 2.9% on a year-on-year basis in December, up from 2.4% in November and potentially creating less urgency for the ECB to start cutting borrowing costs from record highs.
Traders on Friday saw about a 74% chance of the Fed starting to lower its benchmark overnight interest rate from the current 5.25%-5.50% range in March, according to the CME Group’s FedWatch Tool, slightly higher than a week ago.
Elswhere in financial markets, Japan’s Nikkei added 0.3% as exporters got a boost from a weaker yen. A deadly New Year’s Day earthquake in Japan has also forced wagers for the ultra-dovish Bank of Japan to tighten monetary policy this month off the table.
Spot gold added 0.5% to $2,054.39 an ounce.
Oil markets remained volatile as expectations of weak demand from China clashed with concerns about additional Red Sea supply disruptions following attacks on ships by Yemen’s Iran-backed Houthis.
U.S. crude recently rose 2.01% to $73.64 per barrel and Brent was at $78.70, up 1.43% on the day.
(Reporting by Herbert Lash, additional eporting by Naomi Rovnick, Kevin Buckland and Ankur Banerjee; Editing by Ros Russell, Mark Potter, Emelia Sithole-Matarise and Paul Simao)
