Market rally shrugged off conflicting data
The U.S. labour market delivered another contradictory week. Initial jobless claims dropped to levels not seen in decades, helped by seasonal distortions and a rebound in U.S. federal government employment after the shutdown. The message on the surface is simple. Companies are not firing. Continuing claims remain locked near the same range they have held for months, suggesting layoffs remain both low and slow moving.
Beneath that strength, however, the tone is weaker. Manufacturing employment fell, announced layoffs rose compared with last year, and planned hiring for 2025 is tracking at its lowest level since the early 2010s. Early-warning notices from large employers have started to climb again. Small business surveys show rising concern about soft sales, a pattern that usually appears before unemployment rises. The result is an odd combination of resilience at large firms and strain at smaller ones. This is the labour puzzle the U.S. Federal Reserve (the Fed) needs to interpret next week, when it announces its latest rate decision.
Rate-cut expectations have pushed the market sharply higher after the November slump. Sectors that had lagged all year saw an increase, and the Russell 2000 (an index of the smallest 2,000 companies listed on the markets) moved within reach of a record high. Investors are leaning into the idea that rate cuts can arrive in a stable economic backdrop rather than in a recession. That view gained momentum as political chatter suggested a more market-friendly policy team could emerge at the Fed. Whether the rumour is credible or not, the market reacted.
Large tech companies continue to trade well, but a broader of stocks are climbing than in the AI-driven rallies earlier this year. Banks, industrials and other domestic sectors joined the move, and the rebound from the recent lows has more breadth of stocks than at any point since the summer. The question is whether this increased breadth will be long-lasting or if it’s just a blip. The tone of the Fed’s announcement next week will determine how far this broadening is likely to run.
Manufacturing delivered another two-handed message. While production is still growing, demand indicators continue to weaken. New orders slowed, hiring softened and unsold inventories rose at one of the fastest rates on record. This pattern typically signals lower output ahead.
Costs are rising again, due to tariffs and logistics issues. Many industries are reducing staff, adjusting sourcing strategies and delaying investment. Confidence improved slightly as the shutdown ended but remains well below early-year levels. The manufacturing backdrop is not collapsing, but we would’ve liked to see strong improving momentum show up to confirm the rebounding economy. Still, it’s not a result that brought a reaction from the markets. It appears that actual expectations from surveys made during the shutdown were quite low.
Looking ahead, next week will see a Fed rate announcement. With labour signals diverging and manufacturing softening, the market wants clarity on the rate path. The next move from the Fed will decide whether the broadening rally has staying power into year-end.
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