Stocks fall on interest rate fears, recession after jobs data

Good news for the economy means bad news for Wall Street, with stocks falling on Friday on concerns that a still-strong U.S. labor market may actually make a recession more likely.

The S&P 500 was 1.8% lower in early trading Friday after the government’s announcement on employers hired more workers last month than economists expected.

Although employment growth is slowing, the unemployment rate fell to a 50-year low, signaling that the labor market remains tight. Wall Street worries that the Federal Reserve could see that as evidence that the economy has not yet slowed enough to bring inflation under control. This could pave the way for the central bank to keep raising interest rates, which raises the risk of triggering a recession if done too aggressively.

The September jobs report reinforced that the labor market remains tight and will keep the Fed on track to continue aggressive monetary policy tightening,” said Cliff Hodge, chief investment officer, Cornerstone Wealth. “We will remain in the environment where good news for the economy is bad news for the markets.”

The Dow Jones Industrial Average was down 394 points, or 1.3%, at 29,532 in morning trading, and the Nasdaq composite was down 2%. The falls marked a return to form for stocks, which have mostly fallen all year on worries about high inflation, higher interest rates and the possibility of a recession.

Wall Street had bounced back a bit early this week in a strong but short-lived rally after some investors took a hard look at some weaker-than-expected economic data, suggesting the Fed may make it easier to raise interest rates. However, Friday’s jobs report may have dampened hopes for a “pivot” by the Fed, a pattern that has repeated itself several times this year.

“Ultimately, the direction of the stock market is likely to be lower because either the economy and corporate earnings will slow significantly or the Fed will have to raise interest rates even higher and keep them higher for longer,” noted Chris Zaccarelli . Chief Investment Officer of the Independent Advisor Alliance.

Both trends will put pressure on corporate earnings and stock valuations, he noted.

Employers added 263,000 jobs last month. That’s a slowdown from the 315,000 hiring pace in July, but still more than the 250,000 economists had expected.

Pressure on wages

Also discouraging for investors was that the unemployment rate improved for the wrong reasons. Among people who are not working, fewer than usual are actively looking for work. This is a continuation of a long-term trend that could maintain upward pressure on wages and inflation.

Where wages go has a big impact on the Fed, which wants to avoid a cycle where higher workers’ wages lead companies to raise the prices of their products more, which leads to higher inflation and even more demands from workers for higher wages.

Friday’s jobs report showed workers’ average wages rose 5% last month compared to a year earlier. That’s a slowdown from August’s 5.2% growth, but still high enough to worry the Fed.

“We’re not out yet, but we should get closer as the impact of aggressive policy begins to take hold,” said Matt Perron, director of research at Janus Henderson Investors.

Overall, many investors see the jobs data as keeping the Fed on track to raise its key overnight rate by 0.75 of a percentage point next month. It would be the fourth such increase, which is three times the usual amount, and would bring the rate to a range of 3.75% to 4% after starting the year near zero.

By raising interest rates, the Fed hopes to slow the economy and the labor market. This will hopefully reduce the shopping inflation needed to sustain further price rises. They have already seen some effects, as higher mortgage rates have hit the housing sector particularly hard. The danger is that if the Fed goes too far, it could push the economy into recession.

Meanwhile, higher interest rates are squeezing prices for stocks, cryptocurrencies and all kinds of other investments.

Bond yields on the rise

Bond yields rose immediately after the jobs report was released, though they faltered shortly after. The yield on the 10-year note, which helps set interest rates on mortgages and other loans, climbed to 3.89 percent from 3.83 percent late Thursday.

The two-year yield, which more closely tracks expectations for Fed action, rose to 4.30% from 4.26%.

Crude oil, meanwhile, continued its sharp rise and is on track for its biggest weekly gain since March. Benchmark U.S. crude rose 1.2 percent to $89.50 a barrel. Brent crude, the international benchmark, rose 1.2% to $95.54.

They shot higher because major oil-producing countries have pledged to cut output to keep prices up. This should keep pressure on inflation, which is still near a four-decade high but hopefully easing.

The next monthly US inflation update arrives on Thursday. This is the next major economic news that could change the Fed’s thinking on interest rates ahead of its upcoming decision on November 2.

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