Stocks fell, Treasury yields rose and the dollar rose on Friday. New data on the health of the US labor market have solidified investor expectations that the Federal Reserve will need to keep raising interest rates to keep inflation in check.
The S&P 500 fell 2% in early trading, led by rate-sensitive sectors such as technology.
The slight slowdown in employment in the latest report gives both investors and policymakers another sign that the Fed’s efforts to slow the economy and raise interest rates to keep inflation down are having an effect. It provided a signal, but it was balanced by a decline in the unemployment rate. The job market feels relatively strong.
While usually a sign of economic strength, a resilient labor market is bad news for investors. It points out that the Federal Reserve needs to raise interest rates ever more to slow the economy, raise unemployment and keep inflation down.
This is important for investors because higher interest rates push up corporate costs and weigh on stock prices.
“At the moment, the market is looking for some reason to keep an eye on the Fed,” said Ian Lingen, rates strategist at BMO Capital Markets. “This report didn’t give us that.”
Policymakers had already tempered expectations of an immediate policy turnaround ahead of Friday’s data release, warning against market expectations that the Fed’s fight against inflation was all but over. For investors, the fresh numbers reinforced what they had already been told.
Market-based expectations of how much the Fed will raise rates at its November meeting have risen, with another 0.4 percentage point rate hike likely to be confirmed for the fourth time this year.
“This is what the Fed is going to do,” said Andrew Brenner, head of international fixed income at National Alliance Securities, after a sharp slowdown in consumer prices. added that would be required. When the latest data comes out next week to change course for policymakers. “I don’t see anything stopping them at this point.”
Yields on two-year US Treasuries, which are sensitive to interest rate hikes by the US Federal Reserve (Fed), rose and the dollar strengthened. It also suggests investors are wary of pricing in eventual cuts in rate hikes in the near future.
Despite Friday’s sell-off, early-week gains have pushed the S&P 500 up more than 2% in a single week, ending three straight weeks of declines.