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WALL STREET CLOSES LOWER AFTER "TOO-HOT" JOBS (1601 EDT/2001 GMT)
The S&P 500 and the Nasdaq closed lower with Nasdaq leading declines on Friday after U.S. job market growth strongly beat expectations for July, defying near-term recession fears, but rekindling fears of another wave of aggressive Federal Reserve rate hiking.
“Pretty much everything that the Fed would have hoped for, in terms of transitioning to an economy that was potentially starting to slow down and relieve some of the pressure that’s being built into the jobs market, was not in this number," said Marvin Loh, senior macro strategist at State Street.
"Everything that was reported was pretty much what the Fed did not want to see."
To be sure, when the Fed makes its next decision on rates, expected at the September meeting, it will also include data from the August jobs report and more inflation readings including CPI due out next week.
But still, Friday's news already increased the odds of a 75 basis point hike in Sept, according to Loh.
The indexes quickly moved above their morning lows on Friday, because after all the strong jobs report also indicated that the economy still has some strength. But growthier sectors such as consumer discretionary, communications services and technology were the biggest decliners.
The biggest gainer was energy, and while crude fell in late trade it was positive on settlement. The next biggest gainer was financials, also a beneficiary of higher rates as bank stocks outperformed sharply, rising 1.9%.
For the week the S&P rose 0.36% while Nasdaq rose 2.15% and the Dow dipped on 0.13%.
Here is Friday's closing snapshot:
(Sinéad Carew, Herbert Lash)
STIFEL'S BANNISTER RAISES YEAR-END TARGET (1350 EDT/1750 GMT)
Stifel's Chief Equity Strategist, Barry B. Bannister was out on Friday with a more bullish prediction that the S&P 500 would hit 4,400 by year end, up from his previous expectation for 4,200. The target suggests a 6% gain from current levels.
Bannister prefers cyclical Growth sectors such as software, media, tech hardware, retail and semiconductors.
So why is Bannister raising his target? One reason is that the strategist says the S&P 500 Equity Risk Premium indicates 4,400 as a mid-point price target.
And even though recession risks worry investors, and the Fed is worried about inflation, Bannister says he's not worried "because inflation is likely to sharply decline soon in a (highly unusual, COVID policy-shaped) non-recession slowdown."
And also because cyclicals vs. defensives and the S&P 500 P/E had already plunged, this creates a “sell the rumor, buy the fact” environment.
Of course, though Bannister says there are risks including tighter U.S. financial conditions, a lower S&P 500 P/E ratio as well Ukraine/Russia risks.
PESSIMISM FALLS FOR A 4TH-STRAIGHT WEEK - AAII (1310 EDT/1710 GMT)
Individual investor pessimism over the short-term direction of the U.S. stock market declined for the fourth-straight week in the latest American Association of Individual Investors Sentiment Survey (AAII). With this, optimism rose above 30% for the first time in over two months.
AAII reported that bearish sentiment, or expectations that stock prices will fall over the next six months, dipped 1.2 percentage points to 38.9%. Pessimism was last lower on June 2, 2022 (37.1%). Bearish sentiment is above its historical average of 30.5% for the 36th time out of the past 37 weeks.
Bullish sentiment, or expectations that stock prices will rise over the next six months, gained 2.8 percentage points to 30.6%. This is the highest level of optimism recorded since June 2, 2022 (32.0%). Despite its recent rise, bullish sentiment remains below its historical average of 38.0% for the 37th consecutive week.
Neutral sentiment, or expectations that stock prices will stay essentially unchanged over the next six months, slipped 1.6 percentage points to 30.6%. Neutral sentiment is below its historical average of 31.5% for the 13th time in 15 weeks.
With these changes, the bull-bear spread narrowed to -8.3% from -12.4% last week:
AAII said that "both bullish and bearish sentiment as well as the bull-bear spread are currently within their typical ranges."
AAII noted that volatility, inflation, corporate earnings and increased chatter about the possibility of a recession are all likely weighing on individual investors’ short-term expectations for the stock market.
(Terence Gabriel)
HEAT STROKE: A JOBS REPORT DEEP DIVE (1229 EDT/1629 GMT)
As a heatwave persisted across much of the United States, the Labor Department's highly anticipated employment report tossed gasoline on the fire, suggesting the U.S. economy is running hot enough to withstand all the interest rate hikes the Federal Reserve has been and is expected to keep throwing at it.
The U.S. economy added a remarkable 528,000 jobs in July, more than double the 250,000 consensus, according to the Labor Department.
Total payrolls have now recovered all of the 22 million jobs hemorrhaged when pandemic shutdowns shoved the economy into its steepest and most abrupt recession in history. It took 30 months to recover that lost ground:
The report also marks the 19th consecutive month of job gains above the 200,000 mark, which marks the level necessary to accommodate new labor market entrants.
"The strength of the labor market in the face of 250 basis points of rate tightening from the Fed already this year clearly shows that the Fed has more work to do," writes Charlie Ripley, senior investment strategist at Allianz Investment Management. "Overall, today’s report should put the notion of a near-term recession on the back-burner for now and force the aggressive hand of the Fed by putting a 75 basis point rate hike back on the table for the September FOMC meeting."
While gains were seen across the board, the services sector was responsible for more than three fourths of the total, suggesting strong consumer demand.
The report eased worries that the Fed's interest rate hikes have chilled the economy into recession. On the contrary, taken as a standalone, the data suggests that rather than cooling, the economy is heating up:
Wage growth, perhaps the most closely scrutinized element of the report, surprised analysts by bucking the trend and rising higher. Average hourly pay accelerated to 0.5% from June, and posted an annual increase of 5.2%, repeating the previous month's upwardly revised reading.
"I’m surprised in the strength in wage growth, I was looking for a cooling off. That’s the key to the report," said Peter Cardillo, chief market economist at Spartan Capital Securities in New York. "That’s why we’re seeing a sell off in the bond market and it proves that inflation is still a big problem."
Wage inflation is stickier than more transitory items such as energy and food, and suggests that hot price growth is going to take its sweet time returning to the Fed's average annual 2% target:
Despite the surprising strength elsewhere in the data, there was disappointing weakness in the labor market participation rate, which slipped 0.1 percentage point to 62.1%.
The steadily falling rate in part reflects rising retirement, but also suggests some working-age Americans are leaving the labor pool for good, as theorists behind the so-called "great resignation" would have it.
Labor market participation is closely watched by the Fed, and suggests that despite July's blockbuster topline gain, the jobs market remains tight.
Indeed, a lower participation rate means fewer players on the field, which is one reason why the already-low unemployment rate unexpectedly inched even lower to 3.5%:
Speaking of which, when broken down by duration, both the short- and longer-term unemployed saw their slice of the pie shrink.
Only those unemployed from 5 to 14 weeks were served a bigger slice than last month, hinting at the possibility that it's taking longer for fired workers to find new gigs, a notion supported by the most recent JOLTS data, which showed job openings retreating from record highs.
Still, there remain about 1.8 unfilled jobs for every unemployed worker:
Another sour note could be found in the widening racial/ethnic jobless gap.
While unemployment dipped for workers who identify as White, Asian and Hispanic, Black joblessness ticked 0.2 percentage points higher.
This resulted in the White/Black unemployment gap growing 40 basis points to 2.9 percentage points:
Finally, the so-called "real" unemployment rate, which includes workers only marginally attached to the labor market, held firm at 6.7 percent, hovering below the pre-pandemic level.
But the number of workers on part-time shifts due to economic reasons actually rose by 5.3% to 3.89 million. The fact that real unemployment didn't budge is likely attributable to the afore-mentioned dip in the participation rate:
The report moved all asset classes, pulling stocks lower, Treasury yields and the dollar higher.
Interest sensitive megacap market leaders were dragging the indexes lower and putting the S&P 500 on track for a weekly loss.
(Stephen Culp)
HANGOVER AFTER THE PARTY (1007 EDT/1407 GMT)
Wall Street woke up with a headache on Friday, with all three indexes in the red and Nasdaq leading declines. However, the pain has eased somewhat off initial downside levels. This, after a stronger than expected jobs report fueled bets for continued aggressive tightening by the Federal Reserve.
In recent sessions investors had been betting on light at the end of the tightening tunnel. "It's what we feared, which is that the labor market is going to take much longer and much more Fed action to cool down than expected," said Sameer Samana, Senior Global Market Strategist, Wells Fargo Investment Institute. "We partied much too hard coming into this number and there's going to be a hangover."
You'd think investors would be excited about strong job growth, since it seems like strong evidence that the economy is not in a recession. But along with increasing average work hours, lower unemployment and an acceleration of wage growth, it offers nothing to disuade the Fed from raising rates more in its effort to slow down runaway inflation.
"If the Fed wants to engineer a soft landing, a stronger than expected jobs report doesn't achieve that goal. It shows the exact opposite of what the Fed wants," said Adam Sarhan, chief executive of 50 Park Investments in Florida.
The biggest worry is that the numbers will make the Fed even more aggressive according to Sarhan: "The market is scared the Fed is going to overshoot. If they tighten too sharply and too long that's going to cause a hard landing, a deep recession."
Fed futures showed traders pricing in a 62% chance of a 75 basis points hike in September compared with a 40.5% chance just before the report, according to Fedwatch. They priced in a Fed funds rate of 3.5% by year end vs 3.4% before the report, suggesting 118.9 basis points of increases ahead.
Only three of the S&P 500's major industry sectors are above water on Friday with energy up more than 2%, followed by a roughly 1% gain in financials and a 0.6% rise for materials. Banks, which benefit from higher rates, are up more than 2%.
Here is your trading snapshot from 1002 EDT:
(Sinéad Carew, Gertrude Chavez-Dreyfuss)
U.S. STOCK FUTURES SINK AFTER PAYROLLS STUNNER (0900 EDT/1300 GMT)
U.S. equity index futures have weakened after the release of July jobs data at 08:30 a.m. EDT (1230 GMT).
The headline jobs number was well above the estimate, while the unemployment rate dipped to 3.5% vs the 3.6% Reuters poll. Wage data was hotter than expected on a month-over-month and year-over-year basis:
The futures were edging up just ahead of the data, but are now red.
All 11 S&P sector SPDR ETFs are quoted down in premarket trade with tech, communication services, and consumer discretionary taking the biggest hits. Staples and financials are showing the smallest drops.
Regarding the jobs report, Paul Nolte, portfolio manager at Kingsview Asset Management, said, "What we've heard from the various fed governors this week about it being too early to pivot away from a tightening policy is definitely in place with the jobs report that is THIS hot."
Nolte added, "When you look back at the period from 2015 to 2019, the average jobless jobs gain was 190,000, and the unemployment rate was north of 4. We're well below that as far as THE unemployment rate, and certainly we've been averaging two to 300,000 new jobs going forward, so the job market continues to be much hotter than historically normal times. So it gives the Fed reason to continue to raise rates. And that is what's got the market on edge."
Here is a premarket snapshot taken shortly before 0900 EDT:
(Terence Gabriel, Anisha Sircar)
(Terence Gabriel is a Reuters market analyst. The views expressed are his own)