S&P 500 Heads Toward Worst Week Since March 2023: Markets Wrap

(Bloomberg) — Stocks careened toward their worst weekly selloff since March 2023 and bonds whipsawed as another disappointing report on the US labor market revived concerns the economy is cooling and the Federal Reserve is moving too slow to rescue it.

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The S&P 500 dropped 1.7% and the Nasdaq 100 slumped 2.6% as data showed US payroll additions were 23,000 short of forecasts in August. Treasury two-year yields slipped as much as 15 basis points — before paring the move. At the same time, Wall Street bets on a half-point Fed reduction this month faded again — after briefly gaining momentum when Fed Governor Christopher Waller said he’s “open-minded” about the potential for a bigger cut.

“Financial markets have turned their attention toward how much the Fed will ease and how fast the economy is slowing,” said Scott Wren at Wells Fargo Investment Institute. “Expect the near-term volatility to continue.”

Nonfarm payrolls rose by 142,000 last month, leaving the three-month average at the lowest since mid-2020, Bureau of Labor Statistics data showed Friday. The unemployment rate edged down to 4.2%, the first decline in five months, reflecting a reversal in temporary layoffs.

While the stock-market reaction to the previous payrolls data was worse, it’s the first time since 2012 when the S&P 500 posted declines of at least 1.5% for two jobs days in a row.

“August employment data continue the portrayal of an economy running out the string, nearing an inflection point,” said Steven Blitz at TS Lombard. “Whether inflection turns into recession, or something less negative, depends upon how aggressive the Fed counters current negative momentum. Does the Fed go 25 or 50?”

All major groups in the S&P 500 retreated, with losses led by the index’s most-influential group — technology. A gauge of the “Magnificent Seven” megacaps sank 3.5%. Nvidia Corp. lost 4.8%. Broadcom Inc. tumbled 9.4% on a disappointing forecast. The Dow Jones Industrial Average lost 1%. The Russell 2000 of smaller firms slid 1.5%.

Wall Street’s fear gauge — the VIX — soared to around 23. Treasury 10-year yields fell three basis points to 3.70%. The dollar wavered.

“Markets are tumbling as recession fears mount following this morning’s weaker-than-expected jobs report,” said Jose Torres at Interactive Brokers. “Investors question the feasibility of 2025 earnings estimates.”

Torres says that while this month’s figures haven’t been weak enough to warrant a 50 basis-point Fed cut, next week’s consumer and wholesale inflation data may move the needle further.

“The November meeting is a different story, though, ladies and gentlemen: Fed fanatics expect a 50 basis-point trim as economists and traders see the data getting worse before it gets better,” Torres said.

To Krishna Guha at Evercore, Fed Governor Waller’s remarks Friday express a clear preference for getting started with 25 basis-point cut in September and be ready to accelerate to 50 basis points in November or any subsequent meeting if risks to employment increase.

“This is not the worst possible approach,” Guha said. “But in our view it is still not sufficiently forward-leaning in terms of risk management, and as such ‘not risk-friendly’ for markets.”

Wall Street’s Reaction to Jobs:

David Donabedian at CIBC Private Wealth:

The soft August payroll report does not scream recession, but it does underline that the balance of risks to a soft landing scenario are to the downside.

The report does not settle the debate over whether the FOMC lowers rates by 25 bp or 50 bp on Sept. 18. The Fed will see August CPI and retail sales data before their meeting, so that may influence the decision.

The equity market is still trying to figure out how much slowing is going on in the economy. Is it a gentle flow or is stagnation a possibility. Today’s report does not settle that question. It is a coin flip what the Fed will do and futures are evenly split on the 25/50 question for this month. If the Fed lowers rates by 50 bp, the risk is that it looks like the Fed is panicking and that the recession risk is higher than generally believed.

Florian Ielpo at Lombard Odier Investment Managers:

This data does not necessarily green-light the Fed for a 50 basis points cut in September: the sense of emergency isn’t there yet, and much can already be accomplished with a dovish statement in September.

The motto of “not as bad as expected but not good either” is what markets will have to live with for some time now.

Brian Rose at UBS Global Wealth Management:

In our view, the data available so far has not been weak enough to force the Fed to cut aggressively. Next week, CPI data for August will be key as the Fed balances upside inflation risks against downside risks for the labor market. We maintain our base case of a soft landing for the economy with the Fed cutting rates 100 basis points by year-end.

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