The national labour department posted a 467,000 increase in non-farm payrolls for the first month of 2022, as well as 350,000 additional jobs in official revisions of the economic performance for November and December 2021. Instead of any optimistic perception, the S&P 500 broad market index declined on expectations of a possibly "too strong" report on pre-market trading and then dropped to its lowest level since Monday of 4,447 points as a direct response to the jobs data.

According to TeleTrade analyst Ilya Frolov (https://www.teletrade.eu/pt), some investors’ buying volumes on those dips partly saved the week’s overall market sentiment. As a result, the S&P 500 made a temporary rebound up to 4,540 points but met another wave of sell-off. Thus, the situation on U.S. stocks technically remains extremely confusing at the beginning of the new week, even despite the fact that Facebook’s owner Meta Platforms seriously disappointed the market among a variety of mostly very positive Q4 corporate reports from flagman companies like Apple, Google, Microsoft and finally Amazon.

So, what's the real reason for the current market's turbulence and confusion? The major worry is that clear prospects of economic overheating may push the Federal Reserve (Fed) to act faster in curbing its money supply. "Strong hiring and strong wages - and this is when Omicron is meant to be holding back the U.S. economy! Just imagine what could happen in March/April," James Knightley, chief international economist at ING twitted immediately after the jobs report.

The average hourly earnings increased by as much as 0.7% in January alone and by 5.7% year-on-year against 4.7% in December, which the Fed may easily interpret as threatening signs of inflation expectations. TeleTrade analyst considers that, the participation rate, which normally measures the share of the working-age population either working or looking for work also gained 62.2%, that means its best value since March 2020, with an almost perfect unemployment rate of 4.0% for the U.S. economy. Yet, the market seems inclined to give preference to the principle of "better is worse" in this context.

As Fed Watch indicators show, now at least a third of investors are betting on scenarios when "too strong" U.S. jobs combined with growing inflation may encourage the Fed’s head Jerome Powell and his colleagues to raise the Fed Fund Rate by half a percent at its next meeting on March 16, rather than just the 25 basis points that the Fed has suggested as being its first step. Of course, this would partly hinder the conditions needed to easily access money that banks and investment houses have been using to replenish their portfolios of stocks during two-years of an upside rally. Still, this seems to be an exaggeration, considering that bond yields are slightly higher due to 0.5% or even 1.0% higher interest rates and this still does not compensate for 7.0% and higher inflationary jumps.

One way or another, further stability of the upward rally seems to be questionable until the middle of March, when a true reaction will be received after the Fed meeting. In a similar way, stock markets in Europe are having a sluggish response to strong figures on business activity in the Old World. The European Central Bank’s (ECB) intensions are looking misty for investors who are sharply revaluating the euro interest rate risk in response to the ECB’s Chairwoman Christine Lagarde’s press conference last Thursday. Money markets partly imply 40 basis points of possible European rate hikes too by year-end. German benchmark 5-year notes are trading with a positive yield for the first time in nearly four years, as 10-year yields managed to touch a three-year high of 0.2%.

The market suspects the ECB in getting ready for a shift in guidance at its meeting in March.

Disclaimer:

Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.

Ilya Frolov, Chefe de Gestão de Portfólio, TeleTrade