Stock Futures Hold to Tight Range Before Jobs Report

U.S. stocks experienced a predominantly lower morning on Friday, though they recovered from earlier session lows. The Nasdaq Composite showed slight gains, as investors deliberated over how the Federal Reserve would interpret the exceptionally strong September jobs report.

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Here's what's happening:

• The Dow Jones Industrial Average (DJIA) was down by 26 points, representing a 0.1% decrease, bringing it to 33,091 after initially dropping by over 200 points.
• The S&P 500 (SPX) declined by 4 points, or 0.1%, to 4,253, following a drop of more than 30 points earlier.
• The Nasdaq Composite (COMP) gained 6 points, equivalent to a 0.1% increase, reaching 13,227.

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Both the Dow and S&P 500 were heading for weekly losses as October began, with bond yields continuing their upward trend. The Nasdaq was set to end the week with little change.

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What's driving these market movements:The September jobs report had a significant impact on the markets, with the S&P 500 on track to record its fifth consecutive weekly loss, which would be its longest losing streak since May 2022, according to FactSet data.

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The index was down 0.8% for the week on Friday morning, despite a mid-morning rebound that helped stocks recover from earlier losses.

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The Labor Department's data revealed that the U.S. economy added 336,000 new jobs in September, far surpassing economists' expectations of 170,000 new jobs. Additionally, August and July figures were revised higher.

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However, certain details from the report were more favorable for monetary policy. For example, average hourly wages increased by a modest 0.2% in September, resulting in a 12-month rate of change through September of 4.2%. This is a slower pace compared to the prior month's 4.3% and the smallest year-over-year gain since June 2021.

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Andrew Patterson, a Vanguard senior economist, stated, "Like most reports, the Fed will find things to like and dislike here."

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As stocks rebounded from their initial declines, economists at Goldman Sachs Group sent a note to clients expressing confidence that the data aligned with their expectation that the Fed would not raise interest rates again this year, despite senior Fed officials projecting another rate hike in their latest forecasts released last month.

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Renaissance Macro's Neil Dutta noted that he was surprised by the initial market reaction and argued that the data supports the concept of a soft landing, as wage growth appears to have cooled.

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However, market-based expectations for an interest rate hike at the upcoming Fed policy meeting, concluding on November 1, rose to 30%, up from around 20.1% a day earlier, according to the CME's FedWatch tool.

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Treasury yields also increased following the report, with the 10-year Treasury note yield reaching its highest level since August 8, 2007, at nearly 13.3 basis points, standing at 4.839%. Meanwhile, the 2-year note yield rose by 5 basis points to 5.066%. This yield increase led to the flattening of the Treasury yield curve, with the spread between 2-year and 10-year yields reaching its least inverted level in over a year.

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The rising yields exerted more pressure on utility stocks, which have been the worst-performing sector of the S&P 500 over the past month. Rising long-term yields make high-yielding defensive stocks appear less attractive to investors. The S&P 500 utilities sector index dropped by 1.4% in recent trading, making it the second-worst performing sector after consumer staples, another defensive sector.

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Edward Moya, senior market analyst at Oanda, commented, "Good news about the economy means corporate America is going to have to deal with higher interest rates for the rest of this year and probably most of 2024. Interest rate-sensitive stocks and small companies are not going to do well with this current macro backdrop."

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The September nonfarm payrolls report marked the culmination of a week filled with market volatility driven by labor-market data. Earlier in the week, stocks declined following a surprising increase in job openings, then rose on a report of slowing private sector payrolls from ADP. They subsequently dipped again after another low reading on weekly jobless benefit claims.

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