Strong Stock Market Recovery Means Investors Have Faith in Powell’s Forward-Looking Outlook

The U.S. stock market made a spectacular recovery shortly before the cash market close on Friday with some investors treating the intraday sell-off as a buying opportunity ahead of the U.S. consumer inflation data on December 13 and the upcoming Federal Reserve monetary policy statement and interest rate decisions on December 14.

Furthermore, the turnaround suggests one data point like a bearish jobs report is not going to be enough to derail the bullish comments from Fed Chair Powell earlier in the week.

Investors Shrug-off Early Weakness

Stocks were hit hard during the premarket session following the release of hotter-than-expected payrolls and average hourly earnings.

At 13:30 GMT on Friday, the government reported that the economy added 263,000 new jobs in November, much higher than the consensus estimate of 200,000 new jobs. The unemployment rate held steady at 3.7%, but Average Hourly Earnings, a key inflation indicator, jumped 0.6% compared with the prior month and 5.1% against the same month a year ago.

The futures indexes bottomed shortly after the release of the NFP data and well ahead of the cash market opening. The sell-off, which was probably tied to weak speculators in the futures market, never really had a major impact on the cash market. Prices hemmed and hawed after the cash market opening, but after forming a support base, climbed all session long.

Price Action Suggests investors Believe Powell

The solid turnaround on Friday suggests that investors are putting move weight in the positive comments from Federal Reserve Chairman Jerome Powell from earlier in the week than the November Non-Farm Payrolls report that is based on backward looking data. In other words, Powell’s comments were forward looking and pointed toward a financial environment that has the Fed reducing the pace of rate hikes.

On Wednesday, Fed Chair Powell confirmed that smaller interest rate increases are likely ahead even as he sees progress in the fight against inflation and labor market growth as largely inadequate.

Following the trail set forth by other central bank policymakers earlier in the week and the recent minutes from the last Federal Open Market Committee (FOMC) meeting. Powell said he sees the central bank in position to reduce the size of rate hikes as soon as next month. Nonetheless, he did caution that monetary policy is likely to stay restrictive for some time until real signs of progress emerge on inflation.

Volatile Times Ahead of Fed Rate Hike Decision

Expect to see more volatility and two-sided price action until the Fed’s interest rate decision on Dec. 14. Investors are likely to become more data dependent until then especially when Fed members enter the “lockdown period”. Additionally, we still have one more consumer inflation report on Dec. 13.

Traders may have raised interest rate expectations for March and May after the jobs report, but keep in mind those expectations can be reduced with just one cooler than expected CPI report.