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Here’s why stocks fell after the latest strong jobs report

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When news broke last month that the US economy had contracted for the second straight quarter, many pessimists anticipated the official announcement of a recession to follow soon after.

However, this announcement was never made, which proves that the process of identifying a recession is more complicated than relying on the commonly accepted definition of two quarters. But that hasn’t stopped grim prognosticators from predicting a downturn. For example: the richest man in the world declared this week, once again, that a recession was imminent.

Another thing that happened today further complicated the picture of the recession: the Bureau of Labor Statistics revealed that the economy produced a ton of jobs last month and unemployment is still falling.

But the good news for job seekers has not been welcomed by Wall Street. Here’s how a glowing report for Main Street was bad news for Wall Street, the final chapter in the eternal reminder that the stock market is not the economy.

Can job growth be bad?

The Bureau of Labor Statistics released its latest jobs report on Friday, showing that the US economy added 528,000 jobs in July, beating analysts’ expectations of more subdued growth. At the same time, unemployment fell to 3.5%, a level not seen since just before the pandemic.

But for Wall Street, the robust job growth is a signal that the Federal Reserve has yet to properly rein in record inflation, and signals that there could be further interest rate hikes this year.

As [Federal Reserve] Chairman Jerome Powell and his colleagues continue to view the labor market as hot, which remains on the ledger side forcing them to keep raising interest rates, Mark Hamrick, senior economic analyst at Bankrate, said in comments shared with Fortune.

Several major stock indexes fell rapidly on the employment news. The S&P 500 fell 0.1%, while the Nasdaq Composite, whose stocks are more sensitive to interest rate hikes, fell 0.2%. Stock futures also slid with the report, indicating that investors expect prices to continue falling.

There are other stress signals in the market. Yields on ten-year US government bonds jumped to 2.85% with the announcement of the jobs report, after closing at 2.67% on Thursday. But yields on two-year bonds jumped from 3.04% to 3.24%. This means that the yield curve, which is a line that plots government bond interest rates, has inverted even more than it already did, which is usually a signal of a recession.

Other economists agree that the jobs report will likely be seen as a cause for concern when it comes to inflation.

What is normally good news for the economy, for example, more people employed and earning a salary, has become a symbol of concern as inflation continues to remain above the Fed’s target, said Eugenio Aleman, chief economist at financial firm Raymond James, in mixed comments. with Fortune. This report is not good for the markets because it means that the Fed will have to continue its tightening campaign in order to slow job and economic growth.

Inflation, which economists once hoped was transient, has turned out to be anything but. In June, it hit a four-decade high of 9.1%, with high prices spread across different consumer sectors.

As a result, the Fed instituted several hikes in its base interest rate. The first, of 25 basis points, occurred in March, followed by a rise of 50 points in May. In June and July, the bank instituted hikes of 75 basis points, its largest since 1994. The Federal Open Markets Committee, which meets to adopt monetary policy, does not meet in Augustand would signal another potential upside at the end of September.

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2/ https://fortune.com/2022/08/05/stock-market-drop-jobs-report/

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