Stocks tumbled, government bond yields rose and the dollar strengthened on Friday, as new data on the health of the U.S. labor market bolstered investors’ expectations that the Federal Reserve The Federal Reserve will continue to raise interest rates to reduce inflation.
The S&P 500 index fell 2% in early trading, led by rate-sensitive sectors like technology.
While hiring slowed slightly in the latest report, it sent another signal to both investors and policymakers that the Fed’s effort to slow the economy and lower inflation through Higher interest rates are having an impact, which is balanced against a drop in unemployment and feels that the job market remains relatively strong.
While often a sign of economic strength, a resilient labor market is bad news for investors, because it points to the need for the Fed to raise interest rates more than they already are in order to slow the economy, increase unemployment, and reduce inflation.
That’s important to investors because higher rates increase costs for companies, which affects stock prices.
“At this point, the market is looking for any reason for the Fed to blink,” said Ian Lyngen, rate strategist at BMO Capital Markets. “This report is not provided to us.”
Policymakers thwarted any expectations of an immediate policy change in the pre-Friday data release, cautious compared to market expectations that the Fed’s war on inflation is almost over. For investors, the new numbers reinforce what they have been told.
Market-based expectations for how much the Fed will raise rates as officials meet in November push for the increase, close to another three-quarter hike, which will be the fourth this year.
“I would say this is what the Fed is going to do,” Andrew Brenner, head of international fixed income at National Alliance Securities, said of the Fed’s forecast for another strong rate hike. At the same time, it added that consumer prices will fall significantly. when the latest data is released next week to change the course of policymakers. “I don’t see anything to stop them at this point.”
Yields on two-year Treasuries, which are sensitive to Fed rate hikes, edged higher and the dollar strengthened, also suggesting that investors are wary of pricing in a pullback. final interest rate in the near future.
Despite Friday’s drop, a rally earlier in the week sent the S&P 500 index up more than 2% for the week, ending three straight weeks of losses.
