Dow is soaring because traders still see Fed on hold after blowout payrolls rise

A blowout surge in May nonfarm payrolls isn’t denting expectations among fed-funds futures traders for policy makers to leave rates on hold this month — and that’s helping stocks rally sharply on Friday.

Fed-funds futures traders priced in a 27.6% probability the Federal Reserve will lift its key rate by 25 basis points at its June 13-14 policy meeting, according to the CME FedWatch tool. That’s up from 20.4% on Thursday, but down from 64.2% a week ago.

Data showed the U.S. economy added 339,000 jobs in May, blowing past expectations for an increase of 190,000. The unemployment rate, however, rose 3.7% from 3.4%, and wage growth slowed to a 0.3% monthly rise from 0.4% in April, bringing the year-over year growth rate down to 4.3% in May from 4.4%.

Several economists argued the data wouldn’t dissuade the Fed from leaving rates unchanged in June after a series of consecutive rate increases that took the fed-funds rate from near zero to its current level of 5% to 5.25% since March of last year.

See: ‘The upshot is that the Fed can still afford to skip a rate hike in June’ — economists react to May jobs report

That said, the figures still underlined worries about sticky inflation and provided ammo to push back against market expectations for rate cuts later this year, market watchers said. Some argued that the Fed’s June decision remains far from clear cut.

“It’s now a tough call for this month’s meeting as the Fed knows they have raised rates a large amount in a short period of time, caused a couple of mismanaged banks to fail and would like to leave rates on hold at their next meeting,” said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, in emailed comments.

“ On the other hand, the stock market seems unstoppable, the job market is very strong and inflation is down from the highs, but doesn’t appear to be on a sustainable path to their 2% target,” he said.

Bets on a June hike were scaled back this week after remarks by Federal Reserve officials indicated they would consider leaving rates on hold while reserving the ability to lift them at subsequent meetings if warranted.

MarketWatch Interview: Fed’s Harker says skipping June rate hike is returning to normalcy

The Dow Jones Industrial Average
was up 610 points, or 1.9%. The S&P 500
jumped 1.3% to trade at its highest since August.

Stocks were already poised to rally after the Senate late Thursday voted to raise the debt-ceiling, sending the legislation to President Joe Biden for his signature. Treasury Secretary Janet Yellen had warned that the government could run out of the ability to pay its bills as early as June 5 without action.

A debt-ceiling relief rally was in swing, with “hot” jobs numbers and higher yields not presenting a problem, said Louis Navellier, founder of Navellier & Associates, in a note.

“The soft landing crowd is celebrating and the bears are licking their wounds,” he said. “Continued momentum can come from investors with a massive amount of cash parked in money-market funds, which are certainly feeling the fear of missing out at this point.”

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