Stocks Climb as Jobs Data Quell Economic Jitters: Markets Wrap

(Bloomberg) — Stocks rose and bonds fell after the latest labor-market reading helped ease fears about a more pronounced economic slowdown.

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Equities rebounded sharply as data showed US initial jobless claims tumbled by the most in nearly a year, with the numbers also coming below estimates. As economic angst subsided, Treasuries dropped across the curve. While swap traders have reduced their bets on jumbo rate cuts, they are still pricing in about 40 basis points worth of easing for September.

Markets have been on a tailspin since last week’s economic data triggered concerns the Federal Reserve is waiting too long to cut rates from a two-decade high, jeopardizing prospects for a soft landing. Those jitters combined with stretched positioning, underwhelming tech earnings and poor seasonal trends were among the factors spurring massive volatility around the globe.

To Ian Lyngen at BMO Capital Markets, the jobless claims data is being interpreted as evidence the labor market remains solid.

“Some good news this morning with jobless claims coming in less than expected,” said Chris Zaccarelli at Independent Advisor Alliance. “It’s hard to believe a recession has already began. We are exercising caution, but think that the panic that started earlier in the month was overblown.”

The S&P 500 rose 1%, with tech shares leading the charge. Nvidia Corp. jumped 2.5%. Eli Lilly & Co. soared 13% on a bullish outlook. Treasury 10-year yields advanced six basis points to 4%. The dollar was little changed.

Wall Street’s Reaction to Jobless Claims:

Any data which suggests that the Fed isn’t behind the curve in regards to its likely rate-cut in September is welcomed news for investors.

The main focus for the labor market will be on the next monthly jobs report in early September. Until then though, weekly jobless claims will likely warrant increased attention from investors. Jobs feed the consumer and consumption is the lifeblood of the US economy. So investors are hoping to see some stabilization in this area.

Investors have to be careful not to read too much into one report like they did recently with the last payroll report. A holistic interpretation of the labor market is hiring will likely slow throughout the rest of the year, putting some downside risk to income growth. If the data deteriorate quickly from here, the Fed could take more decisive action in September and cut by a half of a percent, which would provide some salve for markets.

Today’s jobless claims data may ease some of the concerns raised by last week’s soft jobs report. But with inflation data due out next week and the stock market still working through its biggest pullback of the year, it’s unclear how much this will move the sentiment needle.

While there has been renewed worry about the labor market, we believe it’s overblown. We have had some incredible exogenous shocks to the labor market over the past four years. Lately, we’ve seen a tremendous flow and now ebb in immigration.

While some market participants are pleading with the Fed to either cut early or by 50 basis points or both, the fact is that the US economy is still in a good position and consumer wealth is as high as it’s ever been. There is a strong argument to be made for keeping rates at current levels. Why should the Fed change course now?

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