Major U.S. stock indexes diverged in early trading on Thursday following the release of a strong private-sector employment report ahead of Friday’s jobs data. The Labor Department reported that weekly jobless claims fell more than expected to 202,000 last week.
Dow Leads Major Averages Higher, Nasdaq Down
The Dow Jones Industrial Average was up over 100 points, or 0.31%, in early trades, led by gains in Home Depot, Chevron, and Goldman Sachs. However, the tech-heavy Nasdaq dropped 0.70%, weighed down by a continued decline in Apple stock following a downgrade from Bank of America citing weakening iPhone demand.
In addition to strong jobs data, the 10-year Treasury yield climbed to the highest level since November after the Federal Reserve’s May meeting minutes signaled potentially faster interest rate hikes this year. Higher yields tend to benefit banks and value stocks over growth and technology shares.
“Futures had initially edged lower after yesterday’s ADP report showed a higher than expected addition of jobs in the U.S. economy in December,” said Deepak Jasani, Head of Retail Research at HDFC Securities. “However, better than expected jobless claims seem to be indicating the job market remains solid.”
Strong Jobs Market Could Keep Pressuring Fed
The latest jobs data and evidence of a still-tight labor market could keep pressure on the Federal Reserve to continue its path of interest rate hikes to tame inflation. Investors are keenly focused on the December nonfarm payrolls report out Friday, which is expected to show the economy added another 200,000 jobs last month.
“Markets continue to weigh up the risk of higher rates, but economic growth concerns on the back of still elevated inflation and tightening monetary policy,” said Tapas Strickland, economist at National Australia Bank.
Most economists think the U.S. job market remains strong even in the face of high inflation and two straight quarters of negative economic growth. This means the Fed is unlikely to veer off its plan to keep hiking rates, potentially causing more volatility for stocks.
“Clarity is needed from the Fed regarding the magnitude of future rate hikes as overly aggressive actions risk destabilizing markets and causing an economic downturn,” said a MarketScreener analysis.
What Wall Street is Saying Ahead of the Jobs Report
As investors await the release of the December nonfarm payrolls report on Friday, analysts offered their views on what to expect from the data.
Brad McMillan, chief investment officer at Commonwealth Financial Network:
- “Bottom line, this economy is still creating jobs at a rapid rate—rapid enough to keep pressure on wages. Job and wage growth at these levels, along with the indications of consumer strength in this week’s data, mean that the Fed will likely continue to see the need to take its tightening campaign up to the point of at least risking recession.”
Lauren Goodwin, economist and portfolio strategist at New York Life Investments:
- “Our views suggest the labor market is poised for some moderation after massive outperformance in 2021 and most of 2022, yet our expectation remains that job growth will cool without collapse.”
Callie Cox, eToro US investment analyst:
- “Recession fears have slightly cooled heading into earnings seasons — there still seems to be job security for many Americans. That keeps wages elevated and gives consumers extra cash to work within the new year.”
Kristina Hooper, chief global market strategist at Invesco:
- “The jobs situation in the U.S. will remain relatively strong in 2023 thanks to the record number of job openings that still need to be filled.”
While stocks overall saw muted moves ahead of Friday’s jobs data, there was significant divergence within sectors and industries.
Technology shares led the declines in the early session, with electric vehicle makers Rivian and Lucid dropping over 5% each. Netflix slid 2% while Nvidia lost 1%. Apple shares extended losses after a downgrade from Bank of America and economic headwinds in China, falling another 2% in early trades.
On the upside, banks and financial stocks continued to climb on rising Treasury yields, with banks Wells Fargo and Bank of America up over 1% each. Oil major Chevron added 1% as crude prices advanced, while retail stock Target jumped 5% following strength in December sales data.
Healthcare stocks were mixed after a strong start to the year – COVID vaccine makers Moderna and Pfizer slipped 0.5% and 0.7% respectively, giving back some 2023 gains. Merck gained over 1%, while health insurer UnitedHealth rose just under 1%. Aerospace giant Boeing rose 1.5% as airlines rebounded.
Apple Declines After Analyst Downgrade
Shares of tech giant Apple dropped around 2% on Thursday, extending year-to-date losses to over 5% and weighing on the Nasdaq Composite index. Apple stock declined after Bank of America downgraded it to Neutral from Buy, lowering its price target to $160 per share from the prior $185.
Bank of America analyst Wamsi Mohan said iPhone demand is weakening heading into the first half of 2024 amid high inflation and rising interest rates, prompting the downgrade and more cautious view. Mohan slightly lowered iPhone shipment estimates during the next six quarters but said he still expects growth through the rest of the year despite economic pressures.
Apple is now trading at around 24 times forward earnings, meaning expectations for growth remain relatively strong from current levels. The stock was down nearly 27% in 2022 and may continue to face pressure if broader markets struggle amid Fed rate hikes.
Key Price Levels to Watch
Major index futures were holding near key technical levels ahead of the open as traders assessed economic data and next moves from the Fed. Here are some of the key levels analysts are watching across markets:
- S&P 500 – Trading around 3,824 ahead of the open, sitting above recent intraday lows near 3,800. A move below 3,800 could signal further downside, while a hold above 3,850 is seen as short-term bullish by technical traders.
- Nasdaq – Around 10,970 in early trades, holding support near the November closing low. A break below 10,900 raises risks of a sharper selloff toward September lows.
- 10-Year Treasury Yield – Yields climbed to 3.755% overnight, the highest since mid-November. A solid break above 3.80% would reinforce the bearish technical shift in bonds.
- Volatility Index (VIX) – The VIX slid under 20 to 19.55 ahead of the open, extending its retreat after recently tagging the closely watched 30 level. Declining volatility signals easing investor jitters recently.
“The market theme all week continues to be “interest rates” as investors position themselves ahead of Friday’s December payroll report,” said analysts at Charles Schwab. “So far stocks have shown some signs of stabilization ahead of the jobs report, but we’ll be looking at the data for clues regarding the Fed’s ultimate policy path in 2023.”
Economic Event Calendar
|MBA Mortgage Applications
|ADP Employment Change
|Initial Jobless Claims
|ISM Services Index
Stay tuned for continuing coverage on the U.S. jobs report and market reaction. Check back for the latest updates.
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