(Bloomberg) — Stocks climbed after a solid jobs report helped quell fears about an economic slowdown that could hurt Corporate America — even if that means a potential delay in Federal Reserve rate cuts.
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Equities rebounded after falling in the immediate aftermath of data showing nonfarm payrolls jumped 272,000 last month — beating all estimates — as wages accelerated. A selloff in Treasuries pushed yields up at least 10 basis points, with swaps no longer pricing in a Fed reduction before December.
“Good news is bad news for the Fed and cuts,” said Alexandra Wilson-Elizondo at Goldman Sachs Asset Management. “We continue to foresee a benign macro backdrop driven by softer, not soft, macro data combined with trend like growth. Ultimately, we think good data is good data in this set-up and equities should continue to trade with strength.”
This is one of the last major reports Fed officials will see before Wednesday’s meeting, when they’re forecast to keep borrowing costs at a two-decade high. A closely watched inflation report — the Consumer Price Index — will be released on the same day.
“Next week’s CPI could help clarify whether the US is enjoying a ‘Goldilocks’ moment of decelerating inflation combined with resilient employment or whether inflationary pressures are persisting,” said Ronald Temple at Lazard.
The S&P 500 hovered near 5,365, with gains industrial and financial shares offsetting tech losses. GameStop Corp. tumbled after the retailer unexpectedly released earnings and a plan to sell up to 75 million additional shares hours before Keith Gill’s highly anticipated return to YouTube drew in speculators.
Treasury 10-year yields jumped 14 basis points to 4.43%. The dollar climbed the most since late April.
While the strong US payrolls data underscore no urgency for the Fed to cut, it’s inflation — not jobs — that will decide that, according to Krishna Guha at Evercore.
“We continue to see a September cut and two total this year as the right thin baseline,” he said. “The data print that should really move markets – either way – is not today’s employment report, it is next week’s CPI report.”
To Bret Kenwell at eToro, the May jobs report is sort of a mixed bag for investors. On the one hand, it calms some worries that the US is hurling toward some sort of economic cliff, as we have seen soft economic data over the last month. On the other hand, this report likely pushes back expectations of a Fed rate cut.
“Today’s jobs report may lower rate-cut expectations,” he said. “But at the end of the day, a strong labor market is hardly a bad thing — especially for an economy that’s so dependent on consumer spending.”
Economists at Citigroup Inc., among the few that were still predicting a Fed cut in July, changed their call to September after May US employment data. Their new forecast is for three quarter-point rate cuts this year — in September, November and December, economists led by Andrew Hollenhorst said.
Wall Street’s Reaction to Jobs:
Even though the unemployment rate rose, the big picture is that it’s hard to see the consumer as being weak given the increase in job growth and above average wage growth in May. This is likely to keep the Fed in a holding pattern, with the first cut likely coming only in September, assuming we continue to see softer inflation.
The headline unemployment number is likely to get a lot of attention because it now has a 4-handle, but the greater-than-expected number of jobs created is the more important data point, in our opinion.
To those who are worried about inflation – especially the Federal Reserve – the report should raise concerns that wage pressure and sticky inflation is more likely to persist than be transitory.
We believe that the Fed is on hold at least until the election and may very well skip rate cuts for the entire year (our base case is still one 25 bps rate cut in December).
Combined with an upside surprise to wages, this effectively takes a September rate hike off the table as there is no concern on the full employment side of the Fed’s dual mandate at the moment.
While the data is not ambiguously hawkish with the unemployment rate ticking up to 4% and weaker job openings from earlier this week, the Fed can have patience and remain data dependent over the next quarter to ensure that inflation is moving sustainably back to target.
Today’s release should reverse much of soft-landing optimism priced in recent weeks on the yields front with the reestablishment of the higher for longer mantra.
The “high for longer” narrative remains firmly in place. Going forward, some moderation is still likely. But the Fed is in no position to cut rates soon and will need to revise their projections when they convene next week.
A resilient labor market can also mean resilient inflation. Stickiness and consistently high prices of goods and services means continued pressure for the consumer. We expect this strong report will dissuade the Fed from lowering interest rates in the near term.
Some of the main moves in markets:
Stocks
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The S&P 500 rose 0.2% as of 10:53 a.m. New York time
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The Nasdaq 100 rose 0.2%
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The Dow Jones Industrial Average rose 0.4%
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The Stoxx Europe 600 was little changed
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The MSCI World Index was little changed
Currencies
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The Bloomberg Dollar Spot Index rose 0.7%
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The euro fell 0.7% to $1.0813
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The British pound fell 0.5% to $1.2726
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The Japanese yen fell 0.9% to 156.96 per dollar
Cryptocurrencies
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Bitcoin rose 1.1% to $71,455.06
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Ether rose 0.6% to $3,822.66
Bonds
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The yield on 10-year Treasuries advanced 14 basis points to 4.43%
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Germany’s 10-year yield advanced eight basis points to 2.63%
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Britain’s 10-year yield advanced nine basis points to 4.26%
Commodities
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West Texas Intermediate crude rose 0.3% to $75.74 a barrel
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Spot gold fell 2.6% to $2,313.42 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Divya Patil and Sujata Rao.
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