The US labor market is starting 2024 on a hot streak, adding 353,000 jobs to the economy in January and outpacing estimates of 185,000. Citi U.S. Equity Strategy Director Drew Pettit and BMO Capital Markets Senior Economist Jennifer Lee join Yahoo Finance Live to discuss what January's hot jobs report could mean for the Federal Reserve, a soft landing scenario, and equity markets.

"I do disagree that good news is actually bad news, I think that's been changing. I think if we had a print like this three, six months ago, we're probably looking at a much more negative equity market," Pettit admits, while Lee believes positive earnings results could convince Fed officials to hold interest rates into the first half of 2024.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Luke Carberry Mogan.

Video Transcript

BRAD SMITH: For more on the jobs report, we turn to our panel. We've got Jennifer Lee, BMO senior economist and managing director, and Drew Pettit who is the Citi US equity strategy director here. Great to have you both here with us today. Jennifer, I want to begin with you. I just want to get your read on this red hot report that just came in on the headline print.

Well, good morning. Thank you very much for having me here. So my first words were, oh my God.

[LAUGHTER]

JENNIFER LEE: Like I think everyone was shocked at this. This whole soft landing, no landing narrative, I think, is going to take flight again. And this is a classic case of how, you know, --the weird times that we're in where good news is bad and bad news would be considered good.

But you know, I think there's no question. This is probably why, and I'm sure if Fed Chair Powell-- I don't know if you had any inkling about this, but I'm sure he's very glad that he dismissed that possibility of a March rate cut because that's definitely not happening.

SEANA SMITH: Drew, how are you looking at this from a strategist perspective? Obviously, March even less likely than the chatter was ahead of this print, but pushing it out there to what we could even see, the odds that we would even have a rate cut here in the first half of the year.

DREW PETTIT: So apologies for coming off a little flat, but I'm not really a sports car driver. I'm more of a-- I have two kids under two. Closer to a mini van kind of guy at this point. So honestly, this doesn't freak me out from an equity perspective. You know, I do disagree that good news is actually bad news. I think that's been changing.

I think if we had a print like this three, six months ago, we're probably looking at a much more negative equity market. Admittedly, like, we're in the middle of earnings season. So there's a lot of micro influence on what's happening in the index action on the equity side right now. But if this feeds through to stronger fundamentals and growth that exceeds our expectations, honestly, I'm fine with the 10-year trading closer to 4% if the index rates and earnings go higher. That's how the market moves higher from here. Maybe we just don't get that big bullish 5,800 type move with rates higher, but equity markets can still work in this environment.

SEANA SMITH: Drew what do you think this does, though with the narrative of a soft landing, the expectation that we could still avoid a recession if rates do stay higher for longer? Because even beyond this print, there were two revisions to the upside when you take a look at November's numbers and December's numbers.

DREW PETTIT: So I hate to pivot away from soft versus no landing. I feel like it's a little bit of jargon at this point. At the end of the day, the inflation numbers coming down, but cost inflation numbers like we saw in average hourly earnings staying higher is just going to put pressure on productivity. So that's where we're focused. Forget about recession.

Again, if it's a mild recession, not going to freak us out. We think there's a lot of productivity gains companies can still make. And I think that's more of an important story whether we get slightly negative real GDP growth this year and slightly higher rates than expected. As long as the long term trajectory of rates is not up towards 5% again, I think we're OK on the fundamentals side.

BRAD SMITH: Jennifer, from your perspective, as we're continuing to monitor wages and how that plays out and shows up in these reports as well, is that doing enough at least, or is that kind of staying elevated enough to outpace where inflation is still extremely sticky, namely in housing, namely in some of the services as well?

JENNIFER LEE: Well, I'm going to go to the-- I've been saying this for some time now. I mean, it's always good news in my humble opinion that we see strong earnings, only because it's good fundamental support for the US consumer. And it allows them to continue spending, and at the same time as I always say, leave-- put some money aside for a rainy day. And that is never a bad thing.

And this is I think the key part here. What I do-- what I am concerned about on the wage front is that this will cause, as you just pointed out, inflation to be stickier for longer. And my fear I guess is that the Fed will keep rates higher for longer. And that could have negative ramifications, you know. So instead of rate cuts as the market was expecting in March, we could get it pushed out a little bit further.

So we're still sticking with our second half of the year timing for rate cuts. But again, we continue to see numbers like this that's going to be on the table, I guess.

SEANA SMITH: Jennifer, what do you think the pace of the rate cuts could potentially look like after we do get that first cut between then and year-end? What are you expecting in terms of how quickly the Fed would potentially reduce rates?

JENNIFER LEE: So again, before this morning's numbers, we're looking for about 100 basis points in total of rate cuts. So for cuts starting, again, in the second half of the year. Pick it June or July, it doesn't matter. But again, roughly 100 basis points, and this is as they focus on the totality of the data as Fed Chair Powell opines all the time.

And as long as inflation continues to start coming down, and these numbers could get revised as well, but obviously this is a very strong report still. And I am quite excited about it. And we also get-- by the way, we do get asked quite a bit about the soft landing, no landing story, so. And I think this bodes well with all of that. And it shows that the US is able to avoid a recession.

BRAD SMITH: Drew, this report drops an hour ahead of the opening bell here. And so now investors, traders trying to figure out what is the first trade that they need to make if they are over positioned for a Fed cut that they anticipated perhaps would come in March or even in May.

DREW PETTIT: Look, admittedly, you're probably going to fade some gains at this point. Like, we've run the index. The S&P is over 4,900 at this point. We probably need to consolidate some gains. I think that's fair at this point.

And I think this strong print, maybe Fed moving out when cuts start, yeah, you can see a little bit of softness after a really strong overnight session. But admittedly, I think if you trade this thing down 5, 6% from here with all this economic strength, you should be a dip buyer.

SEANA SMITH: Jennifer, let's end here on wage growth because that's a another very hot number here within this report month over month basis, is up 6/10 of a percent. Year over year basis, up just about 4 and 1/2 percent. In terms of that last mile for the Fed to get inflation back to 2%, when you take a look at prints that are much hotter, or as hot as this, what does that then do in terms of delaying that potential timeline?

JENNIFER LEE: It's very possible. Now we can't always-- we should never, ever be looking at just one single report, let alone one single number to decide about what the Fed's going to do because again, it's about the totality of the data. So we have to look at all the CPI reports and of course, the core PCE deflators and the super core, and to make sure that inflation is heading down in the right direction before we start seeing those cuts. But again, as of now, we're still looking for roughly a rate cut to come probably in the middle of the year and probably still sticking with July.

SEANA SMITH: Yeah, higher wages putting more money in the pockets of consumers, which you know have been extremely resilient here over the last several months. All right, Jennifer Lee, always great to have you and Drew Pettit. Thanks so much for joining us here this morning.