Futures Drop, Yields Rise as Jobs Fuel Rate Bets: Markets Wrap

(Bloomberg) — US stock futures turned lower and Treasuries sank after data showed a booming labor market that might prompt the Federal Reserve to raise rates sharply at its next meeting.

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Contracts on the S&P 500 slid more than 1% and the two-year Treasury yield jumped toward 3.2% after employers added 528,000 jobs last month, more than double what economists expected. Wage growth also came in stronger than anticipated.

The strong jobs report validates the Fed’s view of a resilient economy that can withstand additional interest-rate hikes. Traders have now recalibrated expectations for Fed policy, with a hike of three-quarters of a percentage point the more likely scenario at the September meeting as the central bank battles inflation.

A handful of Fed officials this week reiterated the central bank’s resolve to bring down high prices. Among them is Fed St Louis President James Bullard, who has said he favors a strategy of front-loading big interest-rate hikes. That stance has likely strengthened after Friday’s job report, paving the path for an outsized hike and ruling out the possibility of a dovish pivot that Fed Chair Jerome Powell hinted at last week.

“This jobs report is consistent with an inflationary boom,” said Neil Dutta, head of economics at Renaissance Macro Research. “The Fed has a lot more work to do and in an odd way, that the Fed needs to get more aggressive in pushing up rates, makes the hard-landing scenario more likely.”

Here’s what else Wall Street is saying about the jobs surprise:

Win Thin, global head of currency strategy at Brown Brothers Harriman & Co:

“Odds of a 75 basis point move next month have shot up, as they should. We still get one more jobs report before the September FOMC but barring a disaster, I think 75 bp then is a done deal.”

Eric Theoret, global macro strategist at Manulife Investment Management:

“For the Fed, this report confirms the need to continue tightening and also endorses much of this week’s Fedspeak that sought to jawbone rate expectations. For markets, the report may pose a challenge for rate-sensitive equities like tech which had recently been leading in terms of sector performance.”

Seema Shah, chief strategist at Principal Global Investors:

“All the jobs lost during the pandemic have now been regained. But while that is positive news, markets will take today’s number as a timely reminder that there is significantly more Fed hiking still to come. Rates are going above 4% — today’s number should put to bed any doubters.”

Peter Boockvar, chief investment officer at Bleakley Financial Group:

“This was a great number with the obvious big upside in hirings but when this is happening at the same time GDP is declining, it means productivity is plunging. Also, as the pace of firing is at the highest level in nine months, this pace of hiring is just not sustainable.”

Despite being the focus of the day for traders, the jobs report supposedly has little value for those trying to predict a recession because it’s backward-looking.

Corporate earnings, combined with thin liquidity that’s common in the summer, took the stock market on a ride this week. Many firms beat expectations and proved they could handle high inflation and a gloomy economic outlook. But investors have resumed shunning global stocks in favor of bonds, according to Bank of America Corp. strategists, who say it’s time to step back from US equities after July’s rally.

US-China tension also remains among the uncertainties clouding the outlook. China announced it would halt cooperation with the US in a number of areas — including working-level talks on climate change and defense — after US House Speaker Nancy Pelosi’s trip to Taiwan this week. China also sent warships across the Taiwan Strait’s median line in the first such incursion in years, a day after likely firing missiles over the island.

West Texas Intermediate stayed below $90 a barrel. Gold fell and Bitcoin gained.

Some of the main moves in markets:

Stocks

  • Futures on the S&P 500 fell 1.1% as of 9:04 a.m. New York time

  • Futures on the Nasdaq 100 fell 1.4%

  • Futures on the Dow Jones Industrial Average fell 0.7%

  • The Stoxx Europe 600 fell 0.7%

  • The MSCI World index rose 0.3%

Currencies

  • The Bloomberg Dollar Spot Index rose 0.7%

  • The euro fell 0.8% to $1.0164

  • The British pound fell 1% to $1.2036

  • The Japanese yen fell 1.3% to 134.68 per dollar

Bonds

  • The yield on 10-year Treasuries advanced 11 basis points to 2.80%

  • Germany’s 10-year yield advanced nine basis points to 0.89%

  • Britain’s 10-year yield advanced nine basis points to 1.98%

Commodities

  • West Texas Intermediate crude fell 0.6% to $88.02 a barrel

  • Gold futures fell 1.1% to $1,786.20 an ounce

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