How the Market is Affecting Rate Increases
U.S. equities were mixed on the week as a blockbuster jobs report had investors bracing for the Federal Reserve to raise rates sharply at its next meeting.
The S&P 500 index rose 0.4 percent to close at 4,145 in the five-day period for a third straight week of gains. The Dow Jones industrial average lost 0.1 percent on the week and the Nasdaq gained 2.2 percent.
Employers added 528,000 jobs in July — far more than economists had estimated — and the unemployment rate dropped to match a five-decade low of 3.5 percent. The United States has now recovered all pandemic-related job losses, with payrolls back to the pre-pandemic level. But the job participation rate fell and wage growth stayed at 5.2 percent.
After the report Friday, Treasury yields surged and swap contracts showed that traders think another rate increase of 75 basis points is now more likely than a 50-basis-points one when the Federal Reserve meets in September.
“The jobs number has the market and investors questioning where that recession is and when it will take hold, so some of the conviction levels are somewhat lower,” Keith Lerner, co-chief investment officer at Truist Advisory Services, said in an interview. “And I think that’s offsetting the other side of the equation, which is that the Fed will have to be more aggressive.”
Fed speakers from around the nation said they had not yet seen persuasive evidence of cooling prices that would suggest inflation was being tamed. Yet data from the Institute for Supply Management showed sharp declines in prices paid by both service providers and manufacturers in July, suggesting an easing in supply pressures.
Roughly 90 percent of the S&P 500, as measured by market capitalization, has reported second-quarter earnings. Analyst estimates suggest that profits from S&P 500 firms are on pace to increase about 7.6 percent for the April-to-June stretch vs. the same quarter a year ago.
Shares of Uber Technologies surged 37 percent on the week, the most ever, after quarterly results showed robust demand as people return to pre-pandemic travel and commute routines. On the flip side, Caterpillar slumped more than 6 percent on a slowdown in China sales.
On Wednesday, consumer price index data is projected to show that inflation rose 8.7 percent from a year earlier in July, down from the four-decade high of 9.1 percent in June.
The Treasury will sell $54 billion of 13-week bills and $42 billion of 26-week bills on Monday. They yielded 2.566 percent and 3.083 percent in when-issued trading, respectively. It will also auction $42 billion of three-year notes Tuesday, $35 billion of 10-year notes Wednesday and sell four- and eight-week bills Thursday.
