Rising Stocks, Higher Yields Suggest Investors Believe Fed Can Engineer Soft Landing

The major U.S. stock indexes are trading higher shortly after the cash market opening on Thursday after a slew of data showed a strong U.S. economy that is decelerating with slowing inflation, suggesting the Federal Reserve can engineer a soft landing.

The blue chip Dow Jones Industrial Average is trading 33898.54, up 154.70 or +0.46%. The benchmark S&P 500 Index is at 4050.17, up 33.95 or +0.85% and the tech-heavy NASDAQ Composite is trading 11468.75, up 155.40 or +1.37%.

There is also significant movement in the Treasury markets with the yield on the 10-Year Note moving above 3.5%.

Better-than-Forecast US Economic Data Setting the Early Bullish Tone

Gross Domestic Product increased at a 2.9% annualized rate in the fourth quarter of 2022 as consumers boosted spending on goods, the Commerce Department said. But momentum rapidly slowed toward the year’s end, as rising interest rates eroded demand.

Growth in personal consumption expenditures slowed to 2.1% on an annualized basis from 2.3% in the prior quarter and the GDP price index, another inflation measure, decelerated to 3.5%.

A separate report from the Labor Department on Thursday showed initial claims for state unemployment benefits dropped 6,000 to a seasonally adjusted 186,000 for the week ended Jan. 21. The number of people receiving benefits after an initial week of aid, a proxy for hiring, increased 20,000 to 1.675 million for the week ended Jan. 14.

US Durable Goods Orders Surge Much More Than Expected in December

A report released by the Commerce Department on Thursday showed new orders for U.S. manufactured durable goods soared by much more than expected in the month of December.

The Commerce Department said durable goods orders spiked by 5.6 percent in December after tumbling by 1.7 percent in November.

Economists had expected durable goods orders to surge by 2.5 percent compared to the 2.1 percent slump that had been reported for the previous month.

So Now a Strong Economy is Good for Stocks?

A little more than a month ago, if GDP, initial claims and durable goods would’ve come in better than expected, the major U.S. stock indexes would’ve tumbled amid expectations of a more aggressive Fed.

However, conditions have changed since then with U.S. consumer inflation falling and traders pricing in a 25 basis point rate hike at next week’s Fed policy meeting. Now investors feel the Fed may be able to pull off a soft-landing if there is a recession.

In other words, investors see the economy as decelerating, but not falling off a cliff as many had anticipated just weeks ago.

With some investors saying the economic data suggests there is more resilience in the economy than is being talked about, some are already calling it a “goldilocks situation” that is not too hot, or not too cold.

Yields and Stocks Rose after the Reports were Released

Remember that after the GDP, Initial Claims and Durable Goods were released, both Treasury yields and stocks rose. These reactions strengthen the case for the Fed to maintain its hawkish stance in coming months as it seeks to cool inflation with interest rates that officials have projected would stay above 5% into next near.

However, it also means that stock market investors see an end to the Fed’s rate hike cycle and perhaps a relatively easier, or softer recession than previously expected.

Moving forward, it’s all about the economy’s resilience and the Fed’s patience in bringing down inflation.