US stocks provide first big rally of 2023 after signs that inflation will ease

 

US stocks advanced on Friday, after the December jobs report and an economic activity survey showed signs that inflation may be cooling, signalling that the Federal Reserve’s interest rate hikes are showing their intended effect.

The Dow Jones Industrial Average increased or 2.13 per cent. The S&P 500 ended up 2.28 per cent higher, whilst the Nasdaq Composite added 2.6 per cent. It was the best day for the Dow and S&P 500 since 30 November and the best for the Nasdaq since 20 December. Every Dow component ended higher on Friday.

Friday’s rally helped stocks end in positive territory for the week, which was the first of the year. The Dow and S&P 500 each closed the week up 1.5 per cent. The Nasdaq advanced 1 per cent.

The December nonfarm payrolls report showed that the US economy added 223,000 jobs last month, slightly higher than the expected 200,000 jobs economists polled by the Dow Jones expected. In addition, wages grew slower than anticipated, increasing 0.3 per cent on the month where economists expected 0.4 per cent.

“All investors care about is that the data suggests inflation is moving towards the Fed’s target. That’s all investors care about and average hourly earnings suggest inflation continues to slow. They are excited about that,” said Michael Arone, chief investment strategist at State Street Global Advisors.

Stocks rose again when the ISM’s nonmanufacturing purchasing managers’ index showed that the services industry contracted in December, a sign that the Fed’s rake hikes may be working to slow the economy.

Across the S&P 500, all sectors closed higher. Materials, Information Technology and Real Estate led the day, closing 3.4 per cent, 3 per cent and 2.9 per cent higher respectively.

In upcoming news this week, the US stock market faces its next big test with the kickoff of a corporate earnings season.

Analysts expect companies in the S&P 500 to report their first year-over-year decline in quarterly earnings since the height of the Covid-19 pandemic in 2020, according to FactSet. Fourth-quarter profits are projected to have dropped 4.1 per cent, a sharp reversal from the more than 31 per cent growth logged a year earlier.

Companies have been battling a host of challenges, including persistently elevated costs, rising interest rates and a once-in-a-generation surge in the dollar. And while analysts have been trimming their earnings expectations, investors are looking to this next round of reports for insights into the resilience of corporate profits and the outlook for stocks.

Investors will review quarterly results this week from some of the country’s biggest banks, including JPMorgan Chase & Co and Bank of America Corp, as well as companies such as Delta Air Lines Inc and UnitedHealth Group Inc. They also will parse the latest consumer-price reading, which is likely to influence the pace of the Federal Reserve’s campaign to raise interest rates.

Figures around the globe

Across the Atlantic, European markets closed higher. Paris rose 1.5 cent, Frankfurt gained 1.2 per cent and London’s FTSE closed 0.9 per cent higher.

In Asian markets, Tokyo’s Nikkei gained 0.6 per cent, Hong Kong’s Hang Seng lost 0.3 per cent and China’s Shanghai Composite closed 0.1 per cent higher.

On Friday, the Australian sharemarket added 0.7 per cent to close at 7110.

Ex-dividends

There is one company set to trade without the right to a dividend.

Perpetual (ASX:PPT) is paying 35 cents fully franked.

Commodities and the dollar

Oil is trading 0.14 per cent higher at US73.77 a barrel.
Gold is trading 1.6 per cent higher at US$1,870 an ounce.
Silver is trading 2.4 per cent higher at US$23.98 an ounce.
Copper is trading 2.4 per cent higher at US$391 a tonne.
Iron ore futures are pointing to a fall of 2 per cent.
One Australian dollar is buying 68.82 US cents.

Sources: Bloomberg, FactSet, IRESS, TradingView, UBS, Bourse Data, Trading Economics, CoinMarketCap.

Disclaimer

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