U.S. stocks gain as investors look to extend ‘soft landing’ rally

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U.S. stocks jumped Monday, with major indexes at levels last seen in mid-December, as investors looked to extend gains logged at the end of last week after a slowdown in wage growth sparked hopes of a “soft landing” for the economy as the Federal Reserve continues its inflation-fighting efforts.

Skeptics see the bounce as part of what’s likely to be a continued tug of war between market participants and Fed officials who have underlined their expectations that the economy will need to see a period of substantial slowing to ultimately quell inflation.

How are stocks trading

  • The Dow Jones Industrial Average rose 224 points, or 0.7%, to 33,855.
  • The S&P 500 was up 45 points, or 1.1%, to 3,940.
  • The Nasdaq Composite advanced 201 points, or 1.9%, to 10,771.

Stocks rose sharply on Friday, turning major indexes positive for the week. The Dow and S&P 500 each posted a 1.5% weekly rise, while the Nasdaq Composite advanced 1%.

What’s driving markets

The first full week of trading for the new year started on a positive note as traders look to extend a big surge on Friday, when jobs and services data raised hopes the Federal Reserve can soon stop raising interest rates and the U.S. economy can avoid a hard landing.

The nonfarm payrolls report showed a healthy pace of job creation and an unemployment rate of just 3.5%. But it also showed a slowing in wage growth, potentially easing pressure on service sector inflation, an area of price pressure that the Fed is keenly eyeing as it tightens monetary policy.

Indeed, an ISM survey of service sector activity illustrated how the Fed’s rate rises — 4.25 percentage points of hikes since March — already seem to be negatively impacting the economy.

Investors were thus emboldened by hopes the Fed could soon stop increasing borrowing costs and that any economic downturn will not be so severe that it badly impacts company earnings.

“On the back of ISM and payrolls, investors immediately moved to price in a less aggressive pace of rate hikes from the Federal Reserve. For instance, futures pricing for the end-2023 rate came down by -10.3bps over the week (-19.0bps on Friday) to 4.48%,” noted Jim Reid, strategist at Deutsche Bank.

“That was a big catalyst for risk assets,” allowing major indexes to turn positive for the week while Treasury yields fell sharply, he said.

But last week’s choppy price patterns could prove to be the norm, analysts said.

“In addition to the probability of interest rates remaining high and a possible economic slowdown, any bullishness triggered by slowing inflation may be offset by stocks still-high valuations and overly optimistic earnings expectations,” said Chris Larkin, managing director for trading at E-trade from Morgan Stanley.

“It could be a recipe for choppy near-term and long-term trading as traders prepare this week for their first look at earnings and inflation data of 2023,” Larkin said.

Analysts said the positive narrative may be re-tested later this week when the U.S. consumer price index is released on Thursday, followed the next day by the fourth quarter corporate earnings season kicking into gear, with JPMorgan Chase Bank of America and Citigroup presenting their results.

U.S. economic updates set for release on Monday include the New York Fed 1- and 5-year inflation expectations at 11 a.m. Eastern. Atlanta Fed President Raphael Bostic is due to speak at 12:30 p.m.

Helping support sentiment on Monday was a positive showing for Asian equities, with Hong Kong’s Hang Seng up 1.9%, as investors cheered China’s reopening as it relaxed COVID-19 restrictions.

Companies in focus

  • Goldman Sachs Group Inc.  is set to begin a large round of staff layoffs this week, cutting as many as 3,200 jobs, according to a report on Monday from Bloomberg. Shares rose 0.7%.
  • Shares of Lululemon Athletica Inc.  tumbled 12% after the yoga-wear company revised its fourth-quarter guidance on Monday by raising its revenue guidance, tweaking its per-share earnings guidance to a tighter range and lowering margin guidance.
  • Tesla Inc.  shares were up nearly 9%, continuing a move that saw the stock reverse an intraday loss Friday of about 8% to close up 2.5%. The initial dip came after Tesla said it has slashed prices in China for the second time in three months, in an apparent effort to boost sales of its electric vehicles hours after announcing disappointing December deliveries in China.
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