(Bloomberg) — Stocks joined gains in bonds after the latest jobs report reinforced bets the Federal Reserve will cut interest rates this year.
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The S&P 500 headed toward a fresh record and Treasury yields dropped across the curve as data showed US hiring moderated in June while the jobless rate rose to the highest since late 2021. Swaps currently project almost two Fed reductions in 2024, and bets have been building around a September start of the policy easing cycle.
Nonfarm payrolls rose by 206,000 in June and job growth in the prior two months was revised down by 111,000. The median forecast in a Bloomberg survey of economists called for a 190,000 increase. The unemployment rate rose to 4.1%, and average hourly earnings cooled.
“Get on with it,” said Neil Dutta at Renaissance Macro Research. “Today’s employment report ought to firm up expectations of a September rate cut. Economic conditions are cooling and that makes the trade-offs different for the Fed.”
Two-year yields dropped 10 basis points to 4.61%. The S&P 500 topped 5,550. Tesla Inc. rose for an eighth straight session — the longest winning run since June 2023. Macy’s Inc. surged 13% on a news report about a sweetened buyout offer. Nvidia Corp. fell, with an analyst downgrading the shares on valuation concerns.
Bitcoin sank on concerns about potential selling by governments, creditors of a failed exchange and beleaguered crypto miners. The pound led gains in major currencies after Keir Starmer’s Labour party swept to a landslide election win, fueling hopes for a period of political calm and a steady approach to the nation’s finances.
The gradual loosening up of a very tight labor market is consistent with the Fed’s “immaculate disinflation narrative” and should give officials confidence to lower rates sometime in the second half, according to Michael Feroli at JPMorgan Chase & Co.
He still sees a first cut in November — but says the path to a September ease got “a little wider.”
“The job market is bending without yet breaking, which boosts the argument for rate cuts,” said David Russell at TradeStation. “Things are not too hot and not too cold. Goldilocks is here and September is in play.”
While the June jobs report topped expectations, other components within the data continued to highlight a softening labor market, noted Bret Kenwell at eToro.
“Consensus expectations call for a September cut and today’s jobs report should increase investors’ confidence in that scenario,” he said.
Chris Larkin at E*Trade from Morgan Stanley, says that the latest jobs data suggest the labor market is slowing — maybe not enough to speed up rate cuts, but perhaps enough to keep the Fed on track for September.
“Net-net, this was good news for the Fed,” he noted.
At Apollo Global Management, Torsten Slok’s view remains unchanged — no Fed cuts in 2024.
He says the jobs report confirms that it is going to take time for the Fed to cool down the economy and inflation.
“Looking ahead, the key discussion in markets will be whether this cooling will accelerate to the downside because of still-elevated costs of financing. Or whether we will see a reaccelerating economy because of high stock prices and tight credit spreads,” Slok noted.
After the jobs data comes Fed Chair Jerome Powell, who on Tuesday will deliver his biannual testimony on Capitol Hill at 10 a.m. in Washington. Then the consumer-price index is issued on Thursday.
“If next week’s CPI is cooperative, the case for a September cut will be that much stronger,” said Chris Low at FHN Financial.
To Michael Reynolds at Glenmede, iInvestors should circle the September Fed meeting as the first truly “live” meeting for rate cut considerations.
“But they should make sure to use a pencil with a good eraser in case inflation does not cooperate by then,” he added,
Wall Street’s Reaction to Jobs:
This job report could provide the Federal Reserve with the confidence to reduce interest rates in September as despite inflation remaining above target, the job market shows clearer signs of cooling. This is the type of job report the Fed has been anticipating: softer yet still decent data, potentially justifying two rate cuts this year.
The equity market may be a little conflicted how to respond to today’s jobs report. On one hand, the downward revisions to prior months and the rise in the unemployment rate raises the odds of a September Fed rate cut – bond markets are certainly celebrating this. But those same figures cannot help but prompt a twinge of concern about the direction of the US economy. The broad host of economic data all point to a softening – today’s report adds to that picture.
So far, we don’t see apocalyptic signs within the labor market, but investors should be wary when the labor market is supported by government payrolls. The downward revisions to the previous two months is consistent with an economic slowdown. We should expect more rhetoric out of the Fed about labor market conditions and the importance of keeping policy appropriate for their dual mandate.
With the Federal Reserve seeing inflation data in the statistical neighborhood of where it wants it to be, it is expected to cut interest rates in September. If the job market continues to cool and inflation allows, the central bank will shift some of its attention away from the stable prices part of its mandate to increasingly focus on the other issue which is maximum employment.
The higher unemployment rate suggests a broader economic slowdown. The cooling in the labor market, despite the higher than consensus estimate for the headline payroll print, portends a broader economic downturn as the all-important consumer becomes more concerned about the ability to find new jobs as well as continued job security.
Fed Bank of New York President John Williams said that while inflation has cooled recently toward the Fed’s 2% target, policymakers are still some distance from their goal.
Bond funds recorded about $19 billion in weekly inflows, the biggest additions since February 2021, according to a note from Bank of America Corp. citing EPFR Global data. The trend suggests investors are “locking in peak yields,” strategist Michael Hartnett wrote.
About $51.9 billion flowed into cash funds in the week through July 3, the biggest addition in two months. Global equity funds record inflows of $10.9 billion in the longest winning streak since December 2021.
Traders are also keeping a close eye on any developments regarding the US presidential race. Joe Biden is embarking on the most consequential weekend of his political career, knowing that he must restore the faith of voters, donors, and party officials deeply skeptical of his acuity — and that any misstep will prove fatal to his reelection campaign.
Corporate Highlights:
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Canada has approved Glencore Plc’s $6.9-billion acquisition of Teck Resources Ltd.’s metallurgical coal business, while the latter announced a $2 billion share buyback and pledged to boost copper output.
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Samsung Electronics Co. posted its fastest pace of sales and profit growth in years, reflecting a recovery in memory chip demand as AI development accelerates globally.
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BBVA SA’s investors voted to support the lender’s bid for rival Banco Sabadell SA, allowing Chairman Carlos Torres to clear one hurdle in his attempt to create a domestic banking giant.
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Shell Plc expects as much as $2 billion of impairments in its second-quarter earnings related to a delayed biofuels plant under construction in the Netherlands and its chemicals facility in Singapore.
Some of the main moves in markets:
Stocks
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The S&P 500 rose 0.3% as of 11:44 a.m. New York time
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The Nasdaq 100 rose 0.8%
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The Dow Jones Industrial Average was little changed
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The Stoxx Europe 600 fell 0.2%
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The MSCI World Index rose 0.2%
Currencies
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The Bloomberg Dollar Spot Index fell 0.1%
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The euro rose 0.1% to $1.0827
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The British pound rose 0.4% to $1.2808
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The Japanese yen rose 0.3% to 160.75 per dollar
Cryptocurrencies
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Bitcoin fell 3.1% to $56,536.62
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Ether fell 4.6% to $2,998.7
Bonds
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The yield on 10-year Treasuries declined eight basis points to 4.28%
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Germany’s 10-year yield declined five basis points to 2.56%
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Britain’s 10-year yield declined seven basis points to 4.13%
Commodities
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West Texas Intermediate crude rose 0.4% to $84.24 a barrel
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Spot gold rose 1.2% to $2,384.33 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from John Viljoen, Divya Patil and Richard Henderson.
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