Stocks rally on consumer Christmas cheer

There has been a sharp rebound on Wall Street today, reversing a five-day long downward trend, after upbeat economic data was embraced by investors.

There was a lot of uncertainty heading into today’s release of November employment data, with a fear lingering that anything too strong might send the markets lower on worries that the Fed would be forced to taper stimulus.

As it happened, the employment report was strong in every way, but rather than dissuade buyers from entering the market, the prospect of a return to full strength for the US economy has brought buyers flooding back.

By early afternoon in New York, the Dow Jones was up 1.12% or 177 points at 15,998. The S&P 500 was not left behind, gaining 1.14% to break above 1800. The bounce snaps a losing streak of five consecutive trading days for the Dow.

The dollar made substantial gains on the Japanese yen, with USD/JPY climbing 1.1% to 102.93, but its performance was mixed against other major currencies.

The biggest economic release of the day was the monthly employment situation report, which revealed a 203,000 increase in non-farm payrolls last month, while the unemployment rate plunged from 7.3% to 7.0%, both results being far better than expected. US unemployment now stands at its lowest level in five years, but the drop is not just the result of job creation: the labour force participation rate remains low at 63%. Nevertheless, the big increase in payrolls will mean tapering is likely to be vigorously discussed at the forthcoming FOMC meeting.

Consumer spirits are rising as we begin the holiday shopping season, which bodes well for consumer spending and therefore the economy as whole. The University of Michigan’s index of consumer sentiment climbed to 82.5 in its initial reading, the best level seen since July.

The employment data and the consumer sentiment level were both so strong that it has helped investors feel confident that the US economy is robust enough to stand up to a reduction in the Fed’s stimulus even if it arrives imminently.

The spanner in the works with regards to tapering could be inflation though. The Personal Consumption Expenditure (PCE) price index is a metric that is closely watched by the Fed (in fact, it is the metric against which the Fed’s ‘longer-run goal’ of 2% inflation is measured). The core PCE index fell to a year-on-year change of 1.1% in October, while the overall rate fell from 0.9% to 0.7% year-on-year. These numbers are woefully below target, and look part of a reasonably long trend, with inflation having consistently undershot the Fed’s target for several months.

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