On Wednesday, the Federal Reserve cut interest rates for the first time since March 2020. Stocks initially reacted coldly to the move, with all three major U.S. market indexes closing in the red after a volatile trading session.

While it is not advisable to read too much into a single day's stock market moves, several key factors are believed to have contributed to Wednesday's sharp market moves.

First, the Fed’s decision to cut interest rates by an out-of-character 50 basis points, rather than the more typical 25 basis points, was seen by some as evidence that the central bank was “behind the curve” — meaning it should have started cutting rates months ago to stimulate the economy.

Second, the Fed's expectations for more modest rate cuts going forward until the end of 2025 are well below investors' expectations for continued aggressive rate cuts, which could unsettle some market participants who worry that high interest rates will drag down the economy too quickly.

On Thursday, however, investors’ fears appeared to ease somewhat. The economy looked relatively solid as initial jobless claims fell to the lowest level since May, manufacturing surveys showed the sector was more resilient than expected and a key wage measure rose.

In fact, the Fed doesn't look like it's behind the curve, according to Eric Wallerstein, chief market strategist at Yardeni Research. "The Fed and the market are extremely worried about unemployment because history repeats itself and that's what we're primarily worried about. And then we get the data, and manufacturing is actually improving on its own, and unemployment is the best it's been since before the summer, and the Fed cuts rates by 50 basis points, and what you get is a kind of nirvana, right? The Fed cuts rates when the U.S. is one of the strongest economies in recent memory."

Three signs of the U.S. economy’s unexpected resilience:

Initial jobless claims

Investors have long worried that prolonged high interest rates would eventually lead to a cascade of layoffs. For a while, they had evidence to support that theory in the form of a steady rise in initial claims for unemployment benefits.

But this week was different. Initial jobless claims for the week ended September 14 were 219,000, the lowest level since May and down from 231,000 the week before.

Meanwhile, unemployment benefit rolls shrank to levels not seen since early June. The number of people receiving unemployment benefits, or the number of people actually receiving unemployment benefits, fell by 14,000 to 1,829,000 in the week ended September 7.

“The first economic data after the ‘huge’ rate cut should please the Fed,” Chris Larkin, managing director of trading and investing at Morgan Stanley’s E*TRADE, said by email. “The lower-than-expected initial jobless claims will not immediately raise concerns that the labor market is slowing too much.”

Wallerstein agrees. "Both initial and continuing claims are now falling, and people were worried that this upward trend would continue. But it has not. There is no evidence of a slowdown or recession."

Manufacturing Survey

The manufacturing sector of the U.S. economy has been dealing with problems for years, from supply chain disruptions during the pandemic to rising labor costs. Because the industry is often seen as an indicator of economic health, its weakening activity has raised concerns about the durability of U.S. economic growth.

But again, those concerns appear to have eased recently. On Thursday, the Philadelphia Fed’s manufacturing business outlook survey showed that manufacturing activity in Delaware, southern New Jersey and central and eastern Pennsylvania turned positive, reversing a summer decline.

The move came after the New York Fed’s Empire State manufacturing survey on Monday showed business activity in the region grew for the first time in more than a year. Yardeni Research’s Wallerstein noted that “improving activity” across multiple manufacturing surveys is a good sign for bearish investors worried about a weakening economy or the Fed falling behind the curve.

Salary growth

Wage growth may also finally be turning a corner, after declining from a peak of 9.3% in early 2022 to 3.1% in May. Indeed’s salary tracker showed that indicated wages grew 3.3% in August, which the company described as “broad-based stability.”

Commenting on the data, Indeed economists Nick Bunker and Allison Shrivastava said: “In short, with nominal wages rising at the same steady and sustainable pace we saw pre-pandemic, the Indeed Salary Tracker suggests the U.S. labor market may be entering a state of recovery.”

Again, Wallerstein believes that this data is a good sign for economic growth and certainly helps to ease investor concerns about a deteriorating labor market. "Real wages are growing, outpacing inflation, and people are spending," he said.

Solid wage growth, resilience in the manufacturing sector and a lack of evidence of mass layoffs all lead Wallerstein to believe the market can continue to rise, albeit with some fits and starts. “As long as the economy is growing stronger than expected, you don’t have to worry,” he said.

The article is forwarded from: Jinshi Data