Stocks plunge, bonds rise as jobs data fuels uncertainty on Wall Street

Key findings

• US stock markets collapsed on Friday, led by technology stocks, after labor market data disappointed Wall Street for the second month in a row.

• The report offered investors little clarity about the pace of upcoming interest rate cuts by the Federal Reserve.

• US Treasury yields fell as investors considered the possibility of a sharp 50 basis point rate cut at the Fed's next meeting later this month.

US stocks slumped on Friday after US jobs data offered investors little clarity on the health of the economy or the prospects for interest rate cuts.

In the US, 142,000 new jobs were created in August, recovering from the dismal 89,000 jobs in July but falling short of economists' expectations. The unemployment rate, which had risen unexpectedly to 4.3 percent in July, fell to 4.2 percent last month.

Stock prices plunged after the report. The Nasdaq Composite and the S&P 500 gave up their initial gains and were down 2.6 percent and 1.7 percent, respectively, by midday. The Dow Jones Industrial Average, which was up in the first 30 minutes of Friday's session, gave up its gains and was down 0.9 percent.

The biggest losses on Friday were recorded by technology stocks, which have been particularly volatile in the past month. The AI ​​darlings Super Micro Computer (SMCI) and Nvidia (NVDA) fell more than 5%. As investors shunned risk, the consumer staples, healthcare and utilities sectors – which have many dividend-paying companies known for withstanding recessions – were the market's best performers.

A repeat of the downturn following the publication of the labor market report in early August

Today's jobs report is the second consecutive report to trigger panic on Wall Street. There was a sell-off in early August after the July report raised concerns that the economy could slide into recession.

While Friday's report was less gloomy than its predecessor, it did little to clarify how much the Federal Reserve will cut interest rates later this month. The Fed has long been expected to cut rates by 25 basis points at a time to avoid a resurgence of inflation, but the likelihood of bigger cuts may have increased as signs of a labor market slowdown mount.

Shortly after Friday's jobs figures were released, traders were expecting about a 50 percent chance that the Fed would cut interest rates by 50 basis points this month, according to CME Group's FedWatch tool, which uses data from federal funds futures trading to quantify rate-cut expectations. By midday, the probability had dropped to about 30 percent, but the debate over how fast and deep the cuts should be only intensified after Friday's jobs report.

Government bonds rise and cause yields to fall

Treasuries rallied, pushing yields lower. The yield on the 10-year Treasury note, which is sensitive to interest rate expectations, rose in the minutes after the data was released, then fell, then rose again. The yield was last at 3.70%, after previously falling as low as 3.66%, the lowest in over a year.

The story continues

The yield on the 2-year bond continued to fall, widening the spread between it and the 10-year bond. The gap between the two is a closely watched indicator of the yield curve, which inverted in July 2022 – meaning that short-term debt was yielding more than long-term debt. Only in recent days has the curve flirted with a sustained return to its normal state, as economic data and a dovish stance from the Fed have pushed down rate forecasts.

However, for many on Wall Street, the steepness of the yield curve does not necessarily mean that the U.S. economy is out of the woods.

“The historical precedent is not particularly favorable in this regard,” Deutsche Bank analyst Jim Reid wrote in a note on Thursday, “because in previous cycles the last phase before the recession was actually a renewed rise of the curve back into positive territory.”

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