Stocks slipped, government bond yields rose and the dollar strengthened on Friday, as fresh data about the health of the labor market in the United States solidified investors’ expectations that the Federal Reserve will need to keep raising interest rates to lower inflation.
The S&P 500 fell 2 percent in early trading, led by rate-sensitive sectors like technology.
While a slight slowdown in hiring in the latest report offered another signal to both investors and policymakers that the Fed’s efforts to slow the economy and lower inflation through higher interest rates were having an effect, it was balanced against a fall in the unemployment rate and a sense that the jobs market remains relatively robust.
While typically a sign of economic strength, a resilient labor market is bad news for investors, as it points to the need for the Fed to raise interest rates even more than it already has in order to slow the economy, raise unemployment and reduce inflation.
That’s important for investors because higher rates raise costs for companies, weighing on stock prices.
“At this point, the market is looking for any reason for the Fed to blink,” said Ian Lyngen, an interest rate strategist at BMO Capital Markets. “This report didn’t give it to us.”
Policymakers had already dampened any expectation of an immediate policy shift in the run-up to Friday’s data release, cautioning against market expectations that the Fed’s fight against inflation was nearly over. For investors, the fresh numbers reinforced what they had already been told.
Market-based expectations of how much the Fed will raise interest rates when officials meet in November nudged upward, close to cementing in another three-quarter-point increase, which would be the fourth of its kind this year.
“I would say this is what the Fed is going to do,” Andrew Brenner, the head of international fixed income at National Alliance Securities, said of forecasts for another aggressive Fed rate increase, adding that it would take a significant slowdown in consumer prices when the latest data is released next week to alter policymakers’ path. “I don’t see anything to deter them at this point.”
The two-year Treasury yield, which is sensitive to interest rate increases from the Fed, ticked higher, and the dollar strengthened, also suggesting that investors are wary of pricing in an eventual reduction in interest rate increases in the near future.
Despite Friday’s drop, a rally earlier in the week left the S&P 500 on course for a gain of more than 2 percent for the week, ending three straight weeks of losses.
