Joy about the US labor market: Dax jumps to over 14,600 points at the weekend

Investors in the financial markets reacted with relief to the publication of the monthly report on the American labor market on Friday.

In December 2022, 223,000 new non-farm jobs were added, after 256,000 in November, the Washington government announced on Friday.

The separate unemployment rate fell surprisingly to 3.5 from 3.6 percent in November.

Experts had previously forecast an average of 200,000 newly created jobs.

Estimates ranged from 130,000 to 350,000.

Hanno Mussler

Editor in Business.

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The German stock market reacted to the surprisingly robust US labor market with gains.

The Dax, which was slightly in the red before the US job market report was published, turned positive.

Only the Dax surpassed the mark of 14,500 points that had been reached on the previous days, shortly before the end of trading the index even jumped over 14,600 points.

With 1.2 percent on Friday, the Dax put a shovel on an already good stock market week.

With 14,610 points at the end of trading on Friday, the Dax, which was just under 14,000 at the end of 2022, has now gained around 4.4 percent.

On Wall Street, the stock indices initially rose by more than 1 percent in trading on Friday.

The dollar, which was mainly weak against the Japanese yen this week, strengthened after the jobs data.

The dollar also gained strength against the euro.

For the first time less than 1.06 dollars had to be paid for one euro this week.

The calculus behind this investor reaction is probably that further rate hikes on a large scale have now become more likely in the dollar area.

Because inflationary pressures remain high.

In 2022, the US Federal Reserve had raised the key interest rate by a total of 4 percentage points to a target range of 4.25 to 4.5 percent with huge interest rate hikes, some of which had not been seen since the 1980s. 

The Fed had also strengthened the dollar, which, measured by the dollar index against a basket of world currencies, had risen to its highest level in ten years in the fourth quarter of 2022.

The euro, for example, had fallen below par with the dollar.

Since the fourth quarter of 2022, however, the possibly deceptive hope had become more and more established on the financial markets that the majority of the interest rate hikes with their unpleasantly slowing down effects on economic output had already taken place.

Harvard professor and former US Treasury Secretary Larry Summers warned on Friday that low interest rates would not return - despite the risk of a recession.

Summer said many investors in the financial markets are wrong in their expectations.

"I suspect turmoil," Summers said, particularly with regard to bond markets in 2023, 

In fact, the signals are not clear.

After all, the US economy is in an unusual situation for Bankhaus Metzler, which has good knowledge of the US through its cooperation with the asset manager Payden: Its analysts recall that economic growth was negative in the first and second quarters of 2022 at the same time The unemployment rate fell from 4.0 percent in January to 3.5 percent in July.

Normally, negative economic growth would have led to an increase in the number of unemployed.

But far from it.

"The shortages in the US labor market cannot be overlooked with around 10.5 million vacancies, historically low jobless claims and another crisp ADP employment report," said the Metzler analysts the morning before publication of the labor market report.

In fact, the US job market shows a mixed picture.

While large companies such as Amazon and Salesforce cut thousands of jobs at the beginning of 2023, medium-sized companies in the USA are creating more jobs.

That was already shown by the ADP report mentioned by Metzler on Thursday, which was again confirmed by the labor market report on Friday.

The analysts at Deutsche Bank therefore call the US labor market "incredibly tight".

Because of the many new jobs, applicants can demand and enforce high starting salaries, which tends to drive inflation.

So far, investors in the bond market have only priced in interest rates rising to 5 percent this year.

But the December Fed meeting minutes, released on the first Wednesday of the New Year, showed the Fed's determination to fight inflation.

"The US Federal Reserve has shown that it expects interest rates to be raised by a further 75 basis points from the current 4.25 to 4.5 percent to 5 to 5.25 percent by the end of 2023," say the analysts at MMWarburg .

They fear: "If the US Federal Reserve sticks to this assessment and makes its monetary policy decisions as announced, this could result in a problem for the markets, as they have decoupled their expectations from the central bank."

This assessment fits the new labor market report.

Despite the many rate hikes, the US economy, especially the labor market, is still more robust than experts are forecasting.

This may bode well for equities in the short term, as corporate earnings may turn out better than expected despite the recession.

In the medium and long term, however, the Fed is likely to make bonds more attractive compared to equities with further interest rate hikes and also weigh on corporate profits, particularly in heavily leveraged companies.