Traders work on the floor of the NYSE
Stocks climbed Friday after the release of employment data showing unemployment up and earnings growth slowing.
Investors are cheering the update because it raises the chances the Fed cuts rates sooner.
One economist called it the “Fed’s dream jobs report.”
Stocks moved up on Friday following the latest jobs report, which showed the unemployment rate ticked higher in August.
Nonfarm payrolls climbed 187,000 last month, beating the consensus forecast of 170,000. The unemployment rate jumped to 3.8% from 3.5% the month before, and wage growth and hourly earnings slowed down.
Each of the three major stock indexes moved in the green after the report published, with the Dow gaining 145 points before midday in New York.
So why exactly are investors cheering a higher unemployment rate?
In short, the data opens the door for the Federal Reserve to cut interest rate hikes sooner than later. This is good news for stocks because that would signal the end of policymakers’ tightening campaign, which has been a headwind for equities for over a year.
Job openings are falling at a steady clip, and hiring and quitting rates are hovering near pre-pandemic levels. That, along with higher unemployment, may not sound like good news for everyday Americans, but as far as markets are concerned, the numbers give reason for optimism.
“This is the Fed’s dream jobs report,” Bill Adams, chief economist for Comerica Bank said. “An uptick in the unemployment rate and moderation of payroll and wage growth mean the Fed is very likely to hold their policy rate steady at the decision later this month.”
A week ago in Jackson Hole, Fed chief Jerome Powell cautioned that more rate hikes were still on the table. But Friday’s jobs data shows rate hikes seem to be having the intended impact, and that the Fed’s next steps may not have to be so severe or restrictive.
“Unemployment jumping takes the pressure off the Fed,” according to Bryce Doty, senior portfolio manager at Sit Investment Associates. “The yield curve will continue to un-invert with 2 year yields declining as investors build in a shift in Fed policy. All this despite a slightly higher number jobs than expected, but downward revisions to previous months more than off set the positive absolute jobs number…the rise in the unemployment rate will steal the show.”
Wall Street, for its part, remains conflicted on whether stocks will rebound out of a rocky August or stay muted through the rest of the year. Historical trends show that September is typically a bad month for equities, especially in the year before presidential elections.
“I just have a hard time believing that inflation is gonna come down, the Fed is going to be cutting rates, and growth will be just fine,” JPMorgan’s chief global stock strategist, Dubravko Lakos, said on August 24.