Uneasiness surrounding the surge in global bond yields hampered stocks in the final session for the week.
Treasury yields extended a weekly surge after the September labor report showed jobs were added at a lower-than-expected rate, but the previous two months were revised upward, and the unemployment rate hit a 48-year low.
The U.S. dollar dipped, gold was higher, and crude oil prices were little changed.
The Dow Jones Industrial Average fell 108 points (0.7%) to 26,447
The S&P 500 Index was down 16 points (0.6%) to 2,886
The Nasdaq Composite tumbled 91 points (1.2%) to 7,788
In moderate volume,840 million shares were traded on the NYSE and 2.6 billion shares changed hands on the Nasdaq
WTI crude oil inched $0.01 higher to $74.34 per barrel and wholesale gasoline was down $0.01 at $2.09 per gallon
The Bloomberg gold spot price gained $4.00 to $1,203.92 per ounce
The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% lower at 95.64
Markets were lower for the week, as the DJIA fell 0.1%, the S&P 500 Index lost 1.0%, and the Nasdaq Composite tumbled 3.2%
September labor report mixed, trade deficit a bit smaller than expected
Non-farm payrolls rose by 134,000 jobs month-over-month in September, compared to the Bloomberg forecast of a 185,000 increase, but the rise of 201,000 seen in August was revised to a gain of 270,000 jobs. The total upward revision to job gains for August and July was 87,000. Excluding government hiring and firing, private sector payrolls increased by 121,000, versus the anticipated gain of 180,000, after rising by 254,000 in August, revised from the 204,000 increase that was initially reported. Job gains occurred in professional and business services, in health care, and in transportation and warehousing. However, the September figure was affected by Hurricane Florence, with the Labor Department noting that it may have contributed to some of the weakness seen in the leisure and hospitality industry.
The unemployment rate declined to 3.7%—a 48-year low—from 3.9%, versus estimates of a dip to 3.8%, while average hourly earnings were up 0.3% m/m, matching projections and August’s downwardly-revised increase. Y/Y, wage gains were 2.8% higher, in line with estimates, and versus August’s 2.9% gain. Finally, average weekly hours remained at August’s unrevised 34.5 rate, as expected.
Today’s report appears to be keeping Fed expectations in tact as the solid upward prior month revisions, the drop in the unemployment rate, and continued growth in wages suggests the labor market remains tight.
A tight labor market is good news for “Main Street” but has implications for “Wall Street” as it raises additional late-cycle risks as it relates to the stock market. Expectations are now that the Fed will hike once more this year, and three times next year, in keeping with an upgraded economic outlook. While the removal of the “accommodative” language is seen as giving the Fed more flexibility both in future actions as well as communications.
The trade balance showed that the deficit widened by a slightly smaller amount than expected to $53.2 billion in August, compared to forecasts of $53.6 billion. July’s deficit was revised modestly lower to $50.0 billion. Exports were down 0.8% m/m at $209.4 billion, while imports gained 0.6% m/m to $262.6 billion.
Treasuries were lower following the employment data, as the yield on the 2-year note rose 1 basis point to 2.88%, the yield on the 10-year note gained 4 bps to 3.24%, and the 30-year bond rate advanced 5 bps to 3.40%
Consumer credit, released in the final hour of trading, showed consumer borrowing expanded by $20.1 billion during August, above the $15.0 billion forecast of economists polled by Bloomberg, while July’s figure was adjusted downward to an increase of $16.6 billion from the originally reported $16.7 billion. Non-revolving debt, which includes student loans and loans for vehicles and mobile homes, rose $15.2 billion, while revolving debt, which includes credit cards, rose by $4.8 billion.
Europe and Asia lower as global uneasiness remains
European equities finished broadly lower, with global uneasiness lingering as the rise in global bond yields persisted, led by Treasury rates in the U.S. after a mixed September non-farm payroll report. Italy’s budget battle continued and U.K. Brexit uncertainty festered to continue to add another layer of skittishness to the markets. The euro was little changed versus the U.S. dollar, even as German factory orders rose more than expected, and the British pound gained ground amid some positive commentary from European Union and U.K. leaders regarding the potential to strike a Brexit deal. Bond yields in the region extended a run.
Stocks in Asia finished mostly lower, following yesterday’s slide in the global markets as uneasiness appeared to surface in the wake of the upward moves in bond yields, led by Treasury rates in the U.S. that was bolstered by stronger-than-expected economic data and some hawkish takeaways from recent appearances by Fed Chairman Jerome Powell. The markets in the region were likely cautious ahead of today’s labor report in the U.S. and while volume remained lighter than usual with mainland Chinese markets remaining closed for a holiday. Stocks in Japan decreased, snapping a string of weekly gains, with the yen rising noticeably yesterday amid the aforementioned global uneasiness. Stocks declined despite a larger-than-expected rise in Japanese household spending for August. Equities in Hong Kong and South Korea were also lower.
Listings in India dropped sharply, with the nation’s market remaining hampered by festering banking system uneasiness, concerns about the impact of the surge in crude oil prices, and the aforementioned bond yield moves. Also, the lingering uneasiness toward the emerging markets has contributed to the pullback, along with this year’s drop in the rupee, while the markets awaited an expected rate hike after the closing bell from the Reserve Bank of India (RBI). However, the RBI surprised the markets by keeping its monetary policy stance unchanged, citing economic risks, trade tensions and the recent rally in oil prices.
Markets in Australia bucked the trend, gaining modest ground, aided by strength in financial and energy issues.
WEEKLY RECAP – Stocks decline for the week despite data, rally in rates unnerves global markets
U.S. stocks finished lower on the week that saw sentiment swing from economic optimism to being unnerved by a U.S.-led rally in global bond yields. The ISM Manufacturing Index slipped more than expected in September but remained solidly in expansion territory, while its counterpart non-Manufacturing Index showed growth in the key services sector unexpectedly accelerated to the second highest pace of all-time.
In the wake of the data, and bolstered by a host of appearances from Fed Chairman Jerome Powell that seemed to foster hawkish takeaways, the U.S. dollar extended a weekly gain and Treasury yields surged. The yield on the 2-year note hit highs not seen since 2008, the 10-year note reached levels not seen since 2011, and the 30-year bond posted a rate last touched in 2014. The surge in rates carried over to Asia and Europe and pressured stock markets, joining lingering trade concerns, festering Italian fiscal uneasiness and enduring U.K. Brexit ambiguity. Consumer discretionary, real estate, communications services and technology sectors were the worst performers as the rally in rates hamstrung conviction, but financials posted a strong advance. Energy issues also moved nicely higher as oil prices continued to run.
The focus on the Fed and rally in global bond rates will likely not fade next week, with the economic calendar yielding a trifecta of September inflation reports, headlined by the Consumer Price Index (CPI) and the Producer Price Index (PPI). The docket will bring a read on how consumers are feeling as October begins, with the preliminary University of Michigan Consumer Sentiment Index. Adding another wrinkle for the markets to contend with, Q3 earnings season is set to kick off with some major banking sector results on display on Friday. Expectations for profit growth this quarter remain high, which could foster some choppiness, but the Street will likely pay close attention to guidance and commentary regarding the current skittishly-optimistic global market environment.
Note: that the bond market in the U.S. will be closed on Monday in honor of Columbus Day.