Jobs data send stocks down
Wall Street bets that signs of a strong labor market could lead the Fed to keep rates high to defeat inflation.
Stocks fell Thursday after reports suggested that the U.S. job market remains much more resilient than expected.
The Standard & Poor’s 500 slipped 35.23 points, or 0.8%, to 4,411.59. The Dow Jones industrial average dropped 366.38 points, or 1.1%, to 33,922.26, and the Nasdaq composite gave up 112.61 points, or 0.8%, to close at 13,679.04.
Although a sturdy labor market keeps the economy out of a long-feared recession, it could also push the Federal Reserve to keep interest rates higher for longer in its campaign to defeat high inflation. That in turn could mean more pressure down the line on the economy and financial markets.
A report from ADP Research Institute suggested that hiring by private employers was much stronger last month than economists expected, with nearly twice as many jobs created as the number forecast.
The ADP report can be volatile and “isn’t necessarily a good predictor of the monthly jobs report” that is more comprehensive and due from the U.S. government on Friday, said Mike Loewengart, head of model portfolio construction at Morgan Stanley’s Global Investment Office.
But it also paired with a separate report showing the number of U.S. workers applying for unemployment last week remains low relative to history, even if it was a bit higher than expected.
Other reports on Thursday offered a nuanced picture. One from the U.S. government said employers advertised fewer job openings in May than expected. That could mean less upward pressure on inflation. A separate report, meanwhile, said growth in U.S. service industries remains brisk and accelerated in June.
Friday’s jobs report probably will have a much bigger effect on Wall Street than anything else this week. If it’s strong like the ADP report, it could mean counterintuitive pain for stocks because it would push the Fed to keep the brakes on the economy in hopes of getting inflation under control. That would raise the risk of a recession later on, even if the strong job market is what’s preventing a downturn at the moment.
“Whether it’s that big of a number” as what the ADP report suggested “or even half of that, it would still be showing that the labor market is very strong and the Fed has not done enough to get inflation down,” said Megan Horneman, chief investment officer at Verdence Capital Advisors.
“Even with some of this nuanced economic data, the bottom line is the labor market is always a lagging indicator” and later to crack under the weight of higher interest rates than other parts of the economy, she said. “We still expect the labor market to get weaker.”
She expects a recession to hit within the next 12 months.
Yields jumped in the bond market as traders ramped up bets for the Fed to keep rates higher for longer than previously expected. Hopes for a potential cut to interest rates by early next year have diminished.
The yield on the 10-year Treasury rose to 4.03% from 3.94% late Wednesday. It helps set rates for mortgages and other important loans.
The two-year Treasury yield, which moves more on expectations for the Fed, climbed to 4.99% from 4.95%.