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Why Fed Minutes and Jobs Data Could Drive the Market’s First Moves in 2023

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  • Two key economic releases could influence investors’ outlook this week.
  • Federal Reserve minutes and US jobs data could fuel the first big market moves in 2023.
  • Here’s how they could spark a much-needed rally — or lead to further declines for stocks.

As 2023 dawns, investors are keenly looking for clues that could provide insight into how stocks are performing in the first few months.

Searing inflation and rising interest rates hammered stocks last year, with the benchmark S&P 500 index falling 19% and the tech-heavy Nasdaq crashing 33%.

This week, two events could set the tone for January by showing whether the Federal Reserve wants – and can – continue its monetary tightening campaign without crushing the American economy.

Here’s why the release of December’s Fed minutes on Wednesday and the latest US jobs report on Friday could fuel the first major market moves of the year.

Fed Minutes

The U.S. central bank raised interest rates aggressively last year in an effort to rein in soaring inflation, pushing its benchmark rate to between 4.25% and 4.5% from nearly zero in March. The institution raised its benchmark rate by 50 basis points in December, slowing its pace after four previous hikes of 75 basis points each.

The sharp rise in borrowing costs over the past year has weighed heavily on equities as it makes holding cash in a bank account more attractive and erodes companies’ future cash flows, driving down their valuations.

The Fed is set to release minutes from its December meeting at 2 p.m. EST on Wednesday, which could give investors a glimpse of whether its rate hikes will continue — or easing of monetary tightening as inflation begins to ease towards its 2% target.

Traders shouldn’t expect major policy changes just yet, according to Wedbush Securities – with US inflation at 7.1% in November and a strong labor market giving the central bank room for further hikes. rate.

“The inflation genie is out of the bottle and the Fed is scrambling to claw it back by continuing its rate hike crusade,” strategists David Chiaverini and Henry Coffey said in a research note released Tuesday.

“While we have seen a slowing in the pace of rate hikes, it does not appear that a rate cut is on the table until we start to see a significant increase in unemployment,” they added.

US employment data

In 2022, the white-hot job market in the United States tended to be bad news for investors.

To recap: The Fed has a “dual mandate” to keep inflation close to 2% while maximizing employment, and continued strength in the labor market has given it license to raise interest rates aggressively. without having to worry about the latter objective.

The release of nonfarm payrolls data at 9:00 a.m. EST on Friday will show how many jobs the economy gained in December — and could set the direction of travel for financial markets over the next few months. next weeks.

Should jobs data weaken in the coming months, this could become one of the defining stories for investors in 2023 – potentially increasing the likelihood that the Fed will have to abandon its current policy bias to support the labor market. work.

“Even though it remains strong in 2022, the labor market is poised to weaken in 2023 as it is a lagging indicator of medicine that takes the longest time to heal,” said Interactive Brokers senior economist José Torres on Monday.

Economists expect Friday’s labor report to show the US economy gained about 200,000 jobs last month, according to Refinitiv. That would be down from November’s figure of 263,000 – but suggests the Fed still has room to continue tightening without crushing the jobs market.

Read more: The market chaos caused by Russia’s invasion of Ukraine may finally be over, according to these 5 charts

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