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The stock market on Friday tried to jump higher after a cooler-than-expected jobs report altered expectations about the Federal Reserve’s monetary policy—but macroeconomic uncertainties prevented that from happening.
The
Dow Jones Industrial Average
closed down 338 points, or 1.1%. The
S&P 500
dropped 1.1%, and the
Nasdaq Composite
fell 1.3%. All three indexes gave up early gains and posted their third straight weekly losses. For the week, the Dow, S&P 500 and Nasdaq fell 3%, 3.3% and 4.2 %, respectively.
First, the good news:
The jobs report “could take some pressure off of them [the Fed] in future meetings, to at least slow the pace of their rate hikes or achieve a level of rates which allows them to pause sooner,” wrote Chris Zaccarelli, chief investment officer at Independent Advisor Alliance.
The U.S. economy added 315,000 jobs in August, slightly below expectations of 318,000 and a deceleration from July’s growth of 526,000 payrolls. The June and July jobs results were revised down by a total of 107,000. The increase in wages in August was 5.2% year-over-year, below expectations of 5.3%.
These results indicate that inflation is becoming a bit less problematic. Slower wage gains mean that companies have less incentive to raise prices, so consumer inflation could keep slowing down. Plus, fewer people in the workforce means less demand for goods and services.
Markets can now envision a day fairly soon when the Fed slows down the pace of interest rate hikes, which are meant to curb inflation by denting economic demand. Fed Chair Jerome Powell said at the annual Jackson Hole Symposium last Friday that the central bank intends to lift interest rates aggressively, spurring bets of a three-quarter of a percentage point hike at the September meeting, rather than a half-point raise.
While the Fed is still likely to do that, the chances are slightly slimmer. There’s now a 56% chance of a three-quarter point hike, according to pricing in the fed funds futures market, down from 75% Thursday. Even if the Fed does implement the larger rate hike, markets are now wondering if the central bank will slow down after September.
Consistent with that, the 2-year Treasury yield has climbed in the past month to 3.4%, but is a hair below the multi-year high of 3.52% it hit earlier this week. That yield attempts to forecast the level of the fed funds rate a couple years from now. The yield represents expectations about Fed rate hikes—and as Treasury yields in general rise, it could force rates on corporate and household bonds higher. That would slow down business and consumer spending.
Therefore, the stock market is pleased to see the yield remain below its high. That’s especially true since the stock market fell almost 8% from its mid-August peak for the summer through Thursday.
However, that didn’t seem to matter when all was said and done this week. While the jobs report makes an acceleration in inflation less likely, Wall Street is awaiting the release of the consumer price index on September 13. Economists expect an 8.7% annualized gain for August, which would be in line with the July result, but still below the June result of 9.1%.
So stock traders don’t want to take too much risk while it remains unclear if the Fed will ease up on rate hikes.
“The Fed has somewhat painted itself in the corner by being so aggressive about how long it’s gonna keep rates high,” said Rhys Williams, chief strategist at Spouting Rock Asset Management.
The other factor helping knock the indexes lower was news out of Russia. Citing mechanical problems, Russian energy company Gazprom said it will halt the Nord Stream gas pipeline. That could restrict energy supply. The price of WTI crude oil ended below its high for the day, but gained 0.5%. Higher oil is not what the consumer—or the stock market—wants.
Here are some stocks on the move Friday:
Broadcom
(ticker: AVGO) rose 1.7% after the chip maker guided for “solid demand” to continue in its fiscal fourth quarter amid steady spending on infrastructure. The company said it expects fourth-quarter revenue of $8.9 billion, ahead of the $8.77 billion expected by analysts.
Shell
(SHEL) was up 1.6% amid news that CEO Ben van Beurden would step down next year, with the board shortlisting four potential successors. Analysts have noted that the CEO’s departure was expected.
Nvidia
(NVDA) stock dropped 2.1% after getting downgraded to Neutral from Outperform at Daiwa Securities.
Dow
Inc.
(DOW) stock fell 1.3% after getting downgraded to Neutral from Overweight at JPMorgan.
Salesforce
(CRM) stock gained 0.1% after getting upgraded to Neutral from Sell at Guggenheim.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com and Jack Denton at jack.denton@dowjones.com
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