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U.S. Stocks May Give Back Ground Following Recent Strength

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December 04 2023 04:15AM

The major U.S. index futures are currently pointing to a lower open on Monday, with stocks likely to give back ground after ending last Friday’s trading mostly higher.

Traders may look to cash in on the recent strength in the markets after the Dow and the S&P 500 ended the previous session at their best closing levels since early 2022.

Stocks have recently benefited from optimism about the outlook for interest rates, as the Federal Reserve is widely expected to leave rates unchanged until cutting rates as early as March 2024.

Overall trading activity may be somewhat subdued, however, as traders look ahead to the release of the Labor Department’s closely watched monthly jobs report on Friday.

Economists currently expect employment to increase by 180,000 jobs in November after rising by 150,000 jobs in October, while the unemployment rate is expected to hold at 3.9 percent.

“Another weaker report, especially one paired with 0.2% monthly wage growth, could further fuel the belief that not only is the tightening cycle over but rate cuts may not be far away,” said Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA.

Reports on service sector activity, private sector jobs, weekly jobless claims and consumer sentiment may also attract attention in the coming days.

Stocks moved mostly higher over the course of the trading session on Friday, with the major averages all climbing firmly into positive territory after showing a lack of direction early in the session.

The Dow and the S&P 500 reached their best closing levels since early 2022, while the tech-heavy Nasdaq ended the day at a four-month closing high.

While the Dow jumped 294.61 points or 0.8 percent to 36,245.50, closing high for the fourth straight session, the S&P 500 advanced 26.83 points or 0.6 percent to 4,594.63 and the Nasdaq climbed 78.81 points or 0.6 percent to 14,305.03.

For the week, the Dow surged by 2.4 percent, the S&P 500 increased by 0.8 percent and the Nasdaq rose by 0.4 percent.

The strength on Wall Street partly reflected ongoing optimism about the outlook for interest rates following the release of a report from the Institute for Supply Management showing a continued contraction in U.S. manufacturing activity in the month of November.

The ISM said its manufacturing PMI came in at 46.7 in November, unchanged from October, with a reading below 50 indicating a contraction. Economists had expected the index to inch up to 47.6.

“The weaker-than-expected ISM survey will reinforce financial markets’ expectations that the Fed’s next move is a cut,” said Bill Adams, Chief Economist for Comerica Bank.

Stocks saw further upside even after Federal Reserve Chair Jerome Powell’s called speculation about interest rate cuts “premature” during remarks at Spelman College.

Powell acknowledged recent signs of slowing price growth but said the Fed is committed to keeping monetary policy restrictive until officials are confident inflation is on a path to 2 percent.

“It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease,” Powell said.

Powell stressed the Fed is prepared to tighten policy further if it becomes appropriate, although most economists believe the central bank is done raising rates.

Jeffrey Roach, Chief Economist for LPL Financial, suggested traders viewed Powell’s comments as inching toward the dovish camp.

“A few weeks ago, Powell said policy is restrictive but today, he believes policy is ‘well into restrictive territory,'” Roach said. “I think it’s fair for markets to latch on to that subtlety.”

Transportation stocks extended the strong upward move seen on Thursday, driving the Dow Jones Transportation Average up by 3.0 percent to a three-month closing high.

Substantial strength also emerged among networking stocks, as reflected by the 2.8 percent surge by the NYSE Arca Networking Index. The index reached its best closing level in two months.

Banking stocks also saw significant strength on the day, with the KBW Bank Index jumping by 2.7 percent to a nearly four-month closing high.

Tobacco, telecom, housing and commercial real estate stocks also moved notably higher amid broad based buying interest on Wall Street.