Wall Street Wavers, Following Surprisingly Strong Jobs Report

Stocks are swinging between small gains and losses as Wall Street works out what to make of surprisingly strong data on the US jobs market released Friday. The S&P 500 rose 0.1 per cent in midday trading after earlier veering from a loss of 0.9 per cent to a gain of 0.3 per cent. On the optimistic side, employers hired many more workers last month than expected despite worries about a possible recession.

However, the hotter the economy remains, the more likely the Federal Reserve is to continue raising interest rates sharply in its fight against inflation. Treasury yields shot higher immediately after the release of the jobs data, underscoring expectations of Fed rate hikes, but then eased back. The yield on the two-year Treasury jumped as high as 3.15 per cent from 3.00 per cent. But it then moderated to 3.07 per cent, and its regression coincided with a recovery for stocks. The Nasdaq composite rose 0.3 per cent after swinging from an early loss of 1.2 per cent to a gain of 0.4 per cent.

The technology and other high-growth companies that make up a big chunk of that index have been some of the most vulnerable to rising rates recently. The Dow Jones Industrial Average rose 84 points, or 0.3 per cent, at 31,469, by 11:15 a.m. Eastern time. It came back from a morning loss of 172 points. The Federal Reserve has already hiked its key overnight interest rate three times this year, and the increases have become increasingly aggressive. Last month it raised rates by the sharpest degree since 1994, by three-quarters of a percentage point to a range of 1.50 per cent to 1.75 per cent.

It was at virtually zero as recently as March. By making it more expensive to borrow, the Fed has already slowed some parts of the economy. The housing market has cooled in particular as mortgage rates rise due to the Fed's actions. Other parts of the economy have also shown signs of flagging, and confidence has fallen sharply among consumers as they contend with the highest inflation in four decades. The hope on Wall Street had been that the recently mixed data on the economy could convince the Federal Reserve to take it easier on rate hikes. This week's reprive from spiking prices for oil and other commodities helped strengthen such hopes. But Friday's jobs report may have undercut them.

Higher interest rates slow the economy by design, and the Fed's intent is to do so enough to force down inflation. The danger is that rates hikes are a notoriously blunt tool, with long lag times before their full effects are seen, and the Fed risks causing a recession if it acts too aggressively. Other central banks around the world are also raising interest rates and removing emergency plans put in place early in the pandemic to prop up financial markets.

One closely watched signal in the US bond market is continuing to warn of a possible recession. The yield on the two-year Treasury this week topped the yield on the 10-year Treasury and remained that way on Friday. It's a relatively rare occurrence that some see as a precursor for a recession within a year or two. Other warning signals in the bond market, which focus on shorter-term yields, are not flashing though.

Even if the Fed can pull off the delicate task of crushing inflation and avoiding a recession, higher interest rates push down on prices for stocks, bonds, cryptocurrencies and all kinds of investments in the meantime. Following Friday's jobs report, traders are universally betting the Fed will raise the target for its short-term interest rate by at least three-quarters of a percentage point at its meeting later this month, according to CME Group. That would match June's big move. A small number of traders are even betting on an increase of a full percentage point. A week ago, no one was predicting that big a move, and some traders were thinking an increase of just half that was the most likely scenario.

(PTI)