U.S. stocks are heading for a weekly gain as traders expect a slowdown in wage growth to aid the Federal Reserve in its battle against inflation. Treasuries rallied. 

The S&P 500 rose more than 2 per cent, climbing the most in more than three weeks. The Nasdaq 100’s gains exceeded 3 per cent. Both indexes are on track to snap four weeks of losses.

Treasuries advanced after a U.S. services gauge unexpectedly shrank at the end of 2022. The dollar headed for its longest streak of weekly losses since November. 

The much-awaited December jobs report failed to offer a clear picture on the state of the American labor market, especially since it came a day after two jobs readings signaled continued tightness. Hiring exceeded estimates for the month and unemployment fell to the lowest in decades, Friday’s report showed. Traders are continuing to mull how that strength contrasts with the weaker gains in hourly wages and what that means for Fed policy ahead. 

“A new 53-year low in the unemployment rate is a real problem, suggesting the Fed made zero progress toward relieving labor market strain in 2022,” wrote Chris Low, chief economist at FHN Financial. “But the combination of the downward revision to November average hourly earnings and a lower-than-expected December rise buys the FOMC more time.”

Recent data only complicates the central bank’s task and creates uncertainty for traders. Kansas City Fed’s Esther George, on Friday, warned that officials will have a tough road ahead as they attempt to balance inflation and employment. Other Fed officials have also continued to be hawkish, saying that while data has been encouraging and inflation is easing, the central bank still has more work to do. 

Swaps contracts show investors now expect the policy rate to peak at under 5 per cent this cycle, down from 5.06 per cent just before Friday’s jobs data. While traders remain divided about the size of February’s hike, with 33 basis points of tightening priced in it appears that a quarter-point move is seen as more likely than a half point increase.

Here’s what else Wall Street is saying about Friday’s jobs report:

Mike Bailey, director of research at FBB Capital Partners:

• “It seems like good news is good news, for a change. Sometimes a hot jobs number is bad news, but investors are seeing the glass half full this morning. Lower wages are pouring cold water on Jay Powell’s plans for more tightening. I would broaden the conversation to add lower-than-expected inflation in Europe and a down market for stocks this week. Put these together with lower U.S. wages and you get a narrative that stocks are cheap, inflation is fading, and investors need to get busy filling out their portfolios before it’s too late.”

Priya Misra, global head of interest rate strategy at TD Securities:

• “The market is reacting to the weaker wages number but I think the report reflects that the labor market remains very tight. The terminal rate priced in before the number was 5.04 per cent and that still looks low to us given our call of the Fed ending at 5.25-5.5 but today’s report should not move it higher. All eyes on ISM services later and CPI next week. The market will remain torn on whether the Fed will hike 25 or 50 in Feb (we think 50)”

Seema Shah, chief global strategist at Principal Asset Management:

• “A lower unemployment rate and weaker average hourly earnings growth is certainly going to get equity market bulls’ attention. Indeed, expectations for a soft landing in the economy have likely been boosted in light of today’s jobs report. Yet, with the unemployment rate back to the historic low of 3.5 per cent, how realistic is it to expect wage growth to move meaningfully lower? The Fed will likely be skeptical.”

Lisa Erickson, senior vice president and head of public markets group at U.S. Bank Wealth Management:

• “The Fed is indicating a keen interest in seeing the labor market normalize. So, as long as we continue to see strong and robust labor growth, that again provides more opportunity for the Fed to overtighten as it goes over time because it’s really trying to bring that part of the economy to more of a slowdown.”

Some of the main moves in markets:

Stocks

• The S&P 500 rose 2.5 per cent as of 3:04 p.m. New York time
• The Nasdaq 100 rose 3.1 per cent
• The Dow Jones Industrial Average rose 2.3 per cent

Currencies

• The Bloomberg Dollar Spot Index fell 1.1 per cent
• The euro rose 1.2 per cent to US$1.0647
• The British pound rose 1.6 per cent to US$1.2096
• The Japanese yen rose 1 per cent to 132.06 per dollar

Cryptocurrencies

• Bitcoin rose 0.7 per cent to US$16,957.14
• Ether rose 1.6 per cent to US$1,272.19

Bonds

• The yield on 10-year Treasuries declined 15 basis points to 3.56 per cent
• Germany’s 10-year yield declined 11 basis points to 2.21 per cent
• Britain’s 10-year yield declined eight basis points to 3.47 per cent

Commodities

• West Texas Intermediate crude rose 0.1 per cent to US$73.77 a barrel
• Gold futures rose 1.8 per cent to US$1,874.40 an ounce