Wall Street slumps on fears about rates, recession after jobs data
Matthew CranstonUnited States correspondent
Updated Oct 8, 2022 – 7.41am, first published at 4.59am
Key Statistics
Washington| Unemployment in the US hit a 50-year low after better than expected jobs growth in September, leaving markets fearful the Federal Reserve will keep raising interest rates to tame consumer demand and inflation.
- 3.5%Unemployment in the US hit a 50-year low in September.
- 5%Wages grew 0.3% or 5% annually.
- 2.1%The Dow Jones Industrial Average ended down. Nasdaq was down 3.8%
- 4.3% The two-year bond yield, which closely tracks Fed action, rose from 4.26%.
- -0.9%ASX futures are down 61 points to 6703.
Employers added another 263,000 jobs last month, more than the 250,000 that economists expected, pushing the unemployment rate down to 3.5 per cent from 3.7 per cent, while wages grew 0.3 per cent over the month or 5 per cent annually.
Many investors see Friday’s jobs data keeping the Fed on track to hike its overnight rate by three-quarters of a percentage point next month. Bloomberg
President Joe Biden said the jobs figures were “an encouraging sign that we are transitioning to stable, steady growth.
“The best days are ahead of us not behind us. Wage growth for workers remains solid, down from its historic high pace, but still growing for workers who deserve a raise.”
But Wall Street showed concern that the Fed would look upon the jobs and wage growth as an indicator the economy has yet to slow enough to start taming the 40-year high in inflation which is still sitting at 8.3 per cent.
The Dow Jones Industrial Average ended down 2.1 per cent and the Nasdaq composite was 3.8 per cent lower. Stocks have tumbled over 20 per cent from records this year on worries about inflation and the possibility of a recession induced by higher interest rates.
Bond yields jumped following the jobs data with the 10-year Treasury, which helps set rates for mortgages and other loans, climbing to 3.88 per cent from 3.83 per cent late Thursday.
The two-year yield, which more closely tracks expectations for Fed action, hit 4.30 per cent from 4.26 per cent. Earlier in the morning, it climbed above 4.33 per cent and was near its highest level since 2007.
Morgan Stanley US economist Ellen Zentner said the strength of the labour market locked in another 0.75 percentage point rate rise at the Fed’s meeting next month bring the Fed funds rate to 4 per cent.
“We continue to see the current data environment providing little room for a Fed pivot to a lower pace of rate hikes in the near term, in particular in light of our expectations for another strong reading in next week’s [inflation figures],” Ms Zentner said.
Making matters worse was evidence that the participation rate, the percentage of working-age people employed or actively looking for work, also declined. The labour force shrunk 57,000 leaving it 1.1 percentage points below the pre-pandemic level of 63.4 per cent.
Economists said any growth in participation was unlikely due to welfare and demographics and as such wage pressures would remain keeping inflation high.
While the key year-over-year increase in wages slipped to 5 per cent from 5.2 per cent and is well off its peak 5.6 per cent growth rate in March, Oxford Economics US economist Nancy Vanden Houten said such growth would not be enough to cool the Fed’s aggressive monetary policy.
“There is evidence of a slight easing in tight labor market conditions. However, it’s not enough to knock the Fed off a track to raise the target range for the federal funds rate by another 125 basis points this year,” Ms Vanden Houten said.
“We assume that job growth, job openings, and importantly the inflation rate will continue to moderate through year-end, allowing the Fed to reduce the amount of rate increase to 50 basis points in December.”
Some financial market strategists such as Schwab Centre for Financial Research Kathy Jones expect the Fed will not lift rates again beyond December this year.
By hiking interest rates, the Fed is hoping to slow the economy and jobs market. The plan is to starve inflation of the purchases needed to keep prices rising even further.
The Fed has already seen some effects, with higher mortgage rates hurting the housing market in particular. The risk is that if the Fed goes too far, it could squeeze the economy into a recession. In the meantime, higher rates push down on prices for stocks, cryptocurrencies and other investments.
“Everything hinges on inflation at this point,” said Peter Essele, head of portfolio management for Commonwealth Financial Network. “We do think it’s going to moderate over the next few quarters.”
Oil price keeps rising
Crude oil, meanwhile, continued its sharp climb and is heading for its biggest weekly gain since March. Benchmark US crude jumped 4.5 per cent to $92.41 per barrel. Brent crude, the international standard, rose 3.8 per cent to $98.
They’ve shot higher because big oil-producing countries have pledged to cut production in order to keep prices up. That should keep the pressure up on inflation, which is still near a four-decade high but hopefully moderating.
The rise for crude helped stocks of oil-related companies to be among Wall Street’s very few to rise Friday. Oilfield services provider Halliburton climbed 3.5 per cent, and ConocoPhillips gained 2.6 per cent.
Stocks of technology companies led the way in the opposite direction. They’ve been among the hardest hit by this year’s rising rates, which most hurt investments seen as the riskiest, most expensive or having to make investors wait the longest for big growth. Microsoft slumped 4.9 per cent, and Amazon fell 5 per cent.
Beyond higher interest rates, analysts say the next hammer to hit stocks could be a potential drop in corporate profits. Companies are contending with high inflation and interest rates eating into their earnings, while the economy slows.
Levi Strauss fell 10.2 per cent after it cut its financial forecast for its fiscal year. It cited the surging value of the US dollar against other currencies, which weakens the dollar value of sales made abroad, as well as a more cautious outlook on economies across North America and Europe.
