Feb 13, 2023 - Economy

Markets have whiplash as inflation cools, but jobs remain strong

Data: CME Group; Chart: Axios Visuals

The January jobs surprise is still rippling through the market.

Why it matters: Investors are reassessing their views on how quickly the Fed will continue hiking interest rates — and that was a drag on stocks last week.

Catch up fast: With inflation having slowed over the back half of last year, investors in January plowed into trades underpinned by the belief the Fed could pause its rate hikes as soon as May.

  • By the end of January, odds that the FOMC's target rate would climb to 5% at its May policy meeting had fallen to just 33% — from 79% back in November. That's according to the Fed funds futures market, where investors can bet on the Fed's next moves.
  • (The Fed funds target range is currently 4.5%-4.75%.)

That all changed when the January employment report showed blistering jobs growth just over a week ago.

The impact: Expectations that the Fed funds rate will cross 5% in May soared right back up to about 80% over the last week.

  • The S&P 500, which had gained about 9% year to date before the jobs report, has shed 1.3% in the week since.

The bottom line: As long as the Phillips Curve — economic shorthand for the way inflation and unemployment typically move in opposite directions — remains disrupted, expect this kind of whiplash in the markets.

  • What we're watching: The next round of inflation data comes out Tuesday with the release of the January Consumer Price Index.
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