In a dramatic turn of events, stocks and bonds rallied on Friday following a turbulent week for investors. The rally came after a new report revealed that the U.S. labor market added fewer jobs than expected in October, signaling a cooling labor market. This news reduced the likelihood of the Federal Reserve raising interest rates again in its efforts to combat inflation. As a result, the stock market, which had experienced a sell-off due to rising rates in recent months, surged, with the S&P 500 on track for its best week of the year.
Investor concerns about longer-dated market rates, driven by factors such as economic growth and inflation expectations, had intensified amid worries about the sustainability of the government’s $33 trillion debt pile. However, these concerns were somewhat alleviated during the week. The Treasury Department’s plans to focus its borrowing towards shorter-term debt eased pressure on longer-dated yields. Moreover, the Federal Reserve’s decision to keep rates steady, along with weaker-than-expected job growth, indicated that its efforts to slow the economy were effective.
While the market reaction appeared positive, some investors cautioned against too much optimism. The increase in the unemployment rate to 3.9% in October raised concerns about a potential upward trend. However, overall, the jobs report led investors to lower expectations of an interest rate hike in December and brought forward predictions of rate cuts next year, suggesting the belief that the Federal Reserve is finished increasing rates and that the economy will continue to slow. The future trajectory of long-term interest rates remains uncertain, as a slowing economy could lower rates over time, but worries about the demand for U.S. government debt may push rates in the opposite direction.
