Wall Street is rallying Friday, after swinging through a shaky start to trading, on hopes that inflation may continue to cool following some mixed readings on the U.S. economy.
The Standard & Poor’s 500 was 1.1% higher, as of 7:20 a.m. PT , after an early 1.2% pop disappeared almost entirely within minutes. The Dow Jones industrial average was up 373 points, or 1.1%, at 33,303 and the Nasdaq composite was .9% higher.
Markets worldwide got an initial jolt from the U.S. jobs report. On the upside for them, it showed workers’ wage gains are slowing, which could mean easing pressure on the nation’s high inflation. On the downside, it also showed hiring across the job market may still be too strong for the Fed’s liking, even after its fusillade of rate hikes last year.
Analysts warned trading may remain turbulent in the coming hours and weeks as investors keep trying to handicap whether the economy can avoid a recession. Much of the trading is based entirely on expectations for what the Fed’s future rate hikes: Higher rates slow the economy by design, hoping to grind down inflation, while also threatening to cause a recession and dragging down prices for all kinds of investments.
Perhaps the clearest action for investors was in the bond market, where yields for the two-year Treasury fell to 4.31% from 4.48% just before the release of the data on wages.
That yield tends to track expectations for Fed action, and some investors are increasing bets that the central bank will dial down the size of its next rate hike following Friday’s data on the economy.
Key for them is the reading showing wages for workers across the country rose 4.6% in December from a year earlier. It’s the smallest raise for workers since two summers ago, and it came despite economists’ expectations for an acceleration.
While weaker raises hurt workers, particularly when they’re still not keeping up with inflation, economists say they could keep the economy out of a vicious cycle where big gains in pay push employers to raise prices for their own products, leading to even higher inflation. It’s something the Federal Reserve has talked about preventing, part of the reason why it’s been hiking interest rates at economy-shaking speed.
“As long as wage gains are coasting to a sustainable altitude, the Fed might continue to throttle back its rate hikes,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments.
A separate report also showed that activity in the U.S. services industries contracted last month for the first time since 2020. Analysts said that’s likely due in part to the rate hikes already pushed through by the Fed, and the weakness could reduce pressure on the nation’s inflation.
The Fed has pulled its key overnight rate up to a range of 4.25% to 4.50% after it began last year at virtually zero.
With inflation showing some signs of cooling in recent months, the Fed last month stepped down the size of its rate increase to .5 percentage points from four straight hikes of .75 points. Traders are largely betting on the Fed to move to the more traditional hike of .25 points at its meeting next month.
AP business writer Yuri Kageyama contributed.