(Bloomberg) — Stocks surged toward their worst weekly sell-off since March 2023 and bonds tumbled as a new disappointing report on the U.S. labor market rekindled concerns that the economy is cooling and the Federal Reserve is coming too late to provide relief.
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The S&P 500 fell 1.7% and the Nasdaq 100 fell 2.6% after data showed U.S. payrolls added 23,000 jobs less than expected in August. Two-year Treasury yields fell 15 basis points before tapering off. Meanwhile, on Wall Street, expectations that the Fed will cut interest rates by half a percentage point this month receded again after Fed Governor Christopher Waller said he was “open to” the possibility of larger rate cuts. That boosted expectations but then faded.
“Financial markets are focused on how much the Fed will ease monetary policy and how quickly the economy will slow,” said Scott Wrenn of Wells Fargo Investment Institute. “We expect volatility to continue in the near term.”
Bureau of Labor Statistics data released Friday showed nonfarm payrolls added 142,000 last month, bringing the three-month average to the lowest since mid-2020. The unemployment rate fell slightly to 4.2%, the first decline in five months, reflecting a reversal in layoffs.
The stock market’s reaction to the last jobs report was poor, marking the first time since 2012 that the S&P 500 has fallen more than 1.5% on two consecutive days.
“August’s jobs data paint a picture of the economy reaching a breaking point and approaching a tipping point,” said Steven Blitz of TS Lombard. “Whether that tipping point turns into a recession or something less negative will depend on how aggressively the Fed counters the current negative momentum. Will they go for 25% or 50%?”
All the major groups in the S&P 500 fell, but the declines were driven by the index’s most powerful technology companies. The “Magnificent Seven” index of mega-cap stocks fell 3.5%. Nvidia fell 4.8%. Broadcom slid 9.4% on a disappointing outlook. The Dow Jones Industrial Average fell 1%. The Russell 2000 index of smaller companies fell 1.5%.
The VIX index, Wall Street’s fear gauge, shot up to around 23. The 10-year Treasury yield fell 3 basis points to 3.70%. The dollar was shaken.
“The market is plummeting as recession fears grow following this morning’s weaker than expected jobs report,” said Jose Torres of Interactive Brokers. “Investors are questioning the viability of 2025 profit expectations.”
Torres said this month’s numbers are not weak enough to justify a 50 basis point Fed cut, but consumer and wholesale inflation figures due next week could move the needle further.
“But the November meeting is a different story, with economists and traders expecting the data to get worse before it gets better, and Fed enthusiasts predicting a 50 basis point cut,” Torres said.
Waller’s comments on Friday signal a clear preference to start with a 25 basis point cut in September and prepare to accelerate cuts to 50 basis points at the November meeting or later if employment risks increase, according to Evercore’s Krishna Guha.
“This is not the worst approach,” Guha said, “but in our view it is still not proactive enough in terms of risk management and therefore not ‘risk friendly’ for the market.”
Wall Street reaction to the hiring:
While the weak August jobs report does not signal a recession, it does highlight that the balance of risks to a soft landing scenario is tilted to the downside.
The report does not settle the debate over whether the FOMC will cut interest rates by 25 or 50 basis points on September 18. The Fed is scheduled to see August consumer price index and retail sales data before the meeting, which could influence its decision.
The stock market is still trying to gauge just how far the economic slowdown is. Is it a gradual trickle or a potential stall? Today’s report doesn’t resolve that question. What the Fed will do is a bit of a coin flip, with futures split 25/50 on the question this month. If the Fed cuts rates by 50bp, there is a risk that the Fed will look like it is panicking and that recession risks are higher than commonly thought.
This data is not necessarily an endorsement for the Fed to cut rates by 50 basis points in September, as there is no sense of urgency yet and a dovish statement in September could already accomplish a lot.
The market will have to accept the motto “not as bad as expected, but not as good either” for some time to come.
In our view, the data so far is not weak enough to force the Fed to cut rates aggressively. August CPI data will be important next week as the Fed balances the risks of rising inflation against the downside risks to the labor market. We maintain our base case for a 100 basis point Fed cut by year end and a soft landing for the economy.
Some of the key market developments:
stock
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The S&P 500 was down 1.7% as of 1:49 p.m. New York time.
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The Nasdaq 100 fell 2.6%
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The Dow Jones Industrial Average fell 1%.
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The MSCI World Index fell 1.4%
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The Bloomberg Magnificent 7 Total Return Index fell 3.5%.
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The Russell 2000 Index fell 1.5%.
currency
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The Bloomberg Dollar Spot Index was little changed.
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The euro fell 0.2% to $1.1086.
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The British pound fell 0.3% to $1.3135.
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The Japanese yen rose 0.8% to 142.34 yen to the dollar.
Cryptocurrency
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Bitcoin fell 4% to $53,825.32.
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Ether fell 5.5% to $2,237.55.
Bonds
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The yield on the 10-year Treasury note fell 3 basis points to 3.70%.
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German 10-year bund yields fell 4 basis points to 2.17%.
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UK 10-year government bond yields fell 3 basis points to 3.89%.
merchandise
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West Texas Intermediate crude fell 2.1% to $67.72 a barrel.
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Spot gold fell 0.9% to $2,494.13 an ounce.
This story was produced with assistance from Bloomberg Automation.
–With assistance from Lu Wang.
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