US stocks fall after surprisingly strong August hiring revived expectations that the Federal Reserve could raise interest rates this month.
NEW YORK: Wall Street ended Friday in the red after a much stronger-than-expected US employment report rattled investors and increased expectations that the Federal Reserve could raise interest rates at its September meeting.
US stocks fall as markets digest an unexpected 162,000 increase in non-farm payrolls during August, dramatically exceeding economists’ forecast of around 56,000 jobs.
The unemployment rate remained unchanged at 4.1 per cent, according to the US Bureau of Labor Statistics.
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The stronger labour market initially offered another sign of resilience in the world’s largest economy. For investors, however, it also raised the possibility that the Federal Reserve may have more room to tighten monetary policy as it continues to confront inflationary pressures.
The S&P 500 declined 0.38 per cent on Friday, while the Nasdaq Composite lost about 0.29 per cent and the Dow Jones Industrial Average dropped around 0.51 per cent.
Expectations for the Federal Reserve’s next move shifted quickly following the employment report. Futures markets put the probability of a quarter-percentage-point rate increase at around 58 per cent after the jobs figures, according to Reuters.
The Fed’s September 15-16 policy meeting will now be closely watched by investors. Bond markets also reacted. The yield on the two-year US Treasury, which is particularly sensitive to expectations about Federal Reserve policy, climbed following the employment figures.
The jobs report showed employment increasing in areas including food services and drinking places and local government education. Manufacturing employment also continued to trend higher. Average hourly earnings increased 0.3 per cent during August and were 3.1 per cent higher than a year earlier.
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Despite Friday’s market reaction, the jobs report alone may not determine what happens to interest rates. Investors are now turning their attention to upcoming US inflation figures, which could provide a clearer indication of whether price pressures are strong enough to justify another increase in borrowing costs.
US stocks fall when investors reassess the outlook for interest rates because higher rates can increase borrowing costs for businesses and reduce the relative appeal of equities.
Impact to expect
The strong employment report could keep Wall Street volatile ahead of the Federal Reserve’s September decision. Investors will be particularly sensitive to the next inflation readings, which could either strengthen or weaken expectations of another rate increase.
If rate expectations continue rising, borrowing costs and bond yields could remain elevated, putting additional pressure on interest-rate-sensitive sectors and highly valued growth stocks.
For global investors, US stocks fall on stronger economic data illustrates an unusual market dynamic: good news about employment can become bad news for equities when it increases the likelihood of tighter monetary policy.
