Top strategist: Economic data makes Powell breathe a sigh of relief, the market will usher in a "rebirth"!

The Federal Reserve cut interest rates for the first time since March 2020 on Wednesday local time. The stock market initially reacted tepidly to the move, and after a volatile trading session, all three major U.S. market indexes closed lower.

While it is not advisable to overinterpret single-day stock market fluctuations, there are several key factors believed to have caused the sharp market volatility on Wednesday.

First, the Federal Reserve decided to cut rates by an unconventional 50 basis points, rather than the common 25 basis points, which some see as evidence of the central bank "lagging behind the situation" - meaning it should have started cutting rates months ago to stimulate the economy.

Second, the Fed's more moderate rate cut expectations until the end of 2025 are much lower than investors' expectations for continued aggressive rate cuts, which may unsettle some market participants concerned about high rates dragging down the economy too quickly.

However, on Thursday, investor fears seemed to ease somewhat. With initial jobless claims falling to the lowest level since May, manufacturing surveys showing more resilience than expected, and key wage indicators rising , the economy appears relatively robust.

In fact, according to Eric Wallerstein, Chief Market Strategist at Yardeni Research, the Fed does not appear to be lagging behind the situation. "The Fed and the market are extremely concerned about unemployment, because history always repeats itself, and that's our main concern. Then we get the data, and actually manufacturing is improving on its own, unemployment data is the best since the summer, and the Fed cut rates by 50 basis points, and what you get is a kind of 'nirvana,' right? The Fed is cutting rates in a situation where the U.S. is one of the strongest economies in recent years."

Three signs of unexpected resilience in the U.S. economy:

Initial Jobless Claims

Investors have long been concerned that persistently high rates would eventually lead to a series of layoffs. For a while, they had evidence to support this theory, namely a steady increase in initial jobless claims.

But this week is different. Initial claims for unemployment benefits for the week ending September 14 were 219,000, the lowest level since May, down from 231,000 the previous week.

At the same time, the number of people receiving unemployment benefits has dropped to levels not seen since early June this year. The number of people receiving unemployment benefits, i.e., those actually receiving unemployment benefits, decreased by 14,000 to 1,829,000 for the week ending September 7.

Chris Larkin, Managing Director of Trading and Investing at E*TRADE, a subsidiary of Morgan Stanley, said via email: "The first economic data after the 'massive' rate cut should make the Fed happy. Lower-than-expected initial jobless claims will not immediately trigger too much concern about a slowdown in the labor market."

Wallerstein agrees with this view. "Both initial and continuing jobless claims are now declining, and people were worried that this upward trend would continue. But that's not the case There is no evidence of slowing down or recession."

Manufacturing Survey

The manufacturing sector in the US has been facing various challenges for years, from supply chain disruptions during the pandemic to continuously rising labor costs. As this industry is often seen as an indicator of economic health, the weakening activity has raised concerns about the sustainability of US economic growth.

However, once again, these concerns seem to have been alleviated 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 has turned positive, reversing the summer's downward trend.

Prior to this, the Empire State manufacturing survey released by the New York Fed on Monday showed growth in business activity for the first time in over a year. Wallerstein from Yardeni Research pointed out that the "improved activity" in multiple manufacturing surveys is a good sign for bearish investors worried about economic weakness or the Fed lagging behind the situation.

Wage Growth

After declining from a peak of 9.3% at the beginning of 2022 to 3.1% in May this year, wage growth may finally be reaching a turning point. Indeed's wage tracker shows that wages increased by 3.3% in August, which the company describes as "broad-based stability."

Indeed economists Nick Bunker and Allison Shrivastava commented on these data, saying: "In short, as wages marked growth at the same stable and sustainable pace we saw before the pandemic, the Indeed wage tracker suggests that the US labor market may be entering a new phase."

Once again, Wallerstein believes that this data is a positive sign for economic growth and also helps alleviate concerns among investors about deteriorating labor market conditions. "Real wages are increasing, outpacing inflation, and people are spending," he said.

Stable wage growth, the resilience of the manufacturing sector, and the lack of evidence of large-scale layoffs all lead Wallerstein to believe that the market can continue to rise, albeit with some intermittent fluctuations. He said, "As long as economic growth exceeds expectations, you have nothing to worry about."