The Dow Jones Industrial Average, S&P 500 and Nasdaq Composite staged a rally on Friday after the December jobs report and an economic activity survey showed signs that inflation may be cooling, signaling that the Federal Reserve’s interest rate hikes are having their intended effect.

As a result, the Nasdaq Composite surged 2.6 percent or 264.05 points to close at 10,569.29. The S&P 500 ended up 86.98 points or 2.28 percent to 3,895.08 followed by the Dow Jones Industrial Average increasing 700.53 points or 2.13 percent to close at 33,630.61.

It was the best day for the Dow and S&P 500 since Nov 30 and the best for the Nasdaq since Dec 29. Every Dow component ended Friday up.

Friday’s rally helped stocks end in positive territory for the week, which was the first of the year. The Dow and S&P 500 each closed the week up 1.5 percent. The Nasdaq advanced 1 percent.

“All investors care about is that the data suggests inflation is moving towards the Fed’s target,” said Michael Arone, chief investment strategist at State Street Global Advisors. “That’s all investors care about and average hourly earnings suggest inflation continues to slow. They are excited about that.”

Stocks rose again when the ISM’s nonmanufacturing purchasing managers’ index showed that the services industry contracted in December, a sign that the Fed’s hikes may be working to slow the economy.

December job report

Hiring slowed modestly in December as employers added 223,000 jobs to close out an otherwise booming year, possibly foreshadowing the deeper pullback and recession that many economists expect in 2023.

The unemployment rate fell from 3.7 percent to 3.5 percent, matching a 50-year low, the US Labor Department said Friday.

For all of 2022, the US added 4.5 million jobs, second most behind the 6.7 million gained the previous year, as the nation continued to heal from record job losses in the early days of the COVID-19 pandemic.

Job gains for October and November were revised down by a total of 28,000. October’s was revised from 284,000 to 263,000 and November’s, from 263,000 to 256,000, painting a slightly weaker portrait of job growth in the fall.

“We think substantially slower payroll growth is coming very soon,” Ian Shepherdson, chief economist of Pantheon Macroeconomics, wrote in a note to clients.

The report featured some good news for a Federal Reserve determined to lower inflation. Last month, average hourly wages rose 9 cents to $32.82, pushing down the annual increase to a still elevated 4.6 percent from 4.8 percent the previous month. The Fed is looking for a pullback in pay increases to beat back inflation that hit a 40-year high last year and pause its aggressive campaign of interest rate hikes that could tip the economy into recession.

Also, the share of adults working or looking for a job edged up to 62.32 percent from 62.2%, still leaving it well below the pre-pandemic level of 63.4 percent. A larger labor supply puts downward pressure on wages as employers don’t need to compete as fervently for job candidates.

Leisure and hospitality, the industry hit hardest by the pandemic, led the job gains for December 2022 with 67,000.

Leisure and hospitality, the industry hit hardest by the pandemic, led the job gains with 67,000. Health care added 55,000 jobs, construction 28,000 and social assistance 20,000.

Gains in other sectors were weak, with manufacturing adding 8,000 jobs, retail 9,000, and transportation and warehousing 5,000.

Temporary help services shed 35,000 jobs, its fifth straight monthly decline. That could foreshadow deeper job losses across the broader economy in the months ahead since employers often cut temporary workers before laying off permanent staffers.

Another hint of a coming slowdown: Americans worked an average of 34.3 hours last month, marking the second straight monthly decline and the lowest level since April 2020. Employers typically work existing employees fewer hours before cutting jobs and hiring.

By August, the economy recovered all 22 million wiped out in the health crisis. But payrolls are still a couple of million jobs shy of where they would be if the pandemic hadn’t happened, based on population growth. Leisure and hospitality, the sector hit hardest by the crisis, remains nearly 1 million jobs below its pre-COVID level.

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