[New York Stock Market] Fed Tightening Strengthened by Job Growth... Nasdaq Down 0.5%

[Image source=Reuters Yonhap News]

[Asia Economy New York=Special Correspondent Joselgina] Major indices on the U.S. New York Stock Exchange closed mixed on the 5th (local time) as a stronger-than-expected employment report reinforced the Federal Reserve's (Fed) commitment to aggressive tightening. The probability of a 0.75 percentage point rate hike in September surged from around 34% to the mid-60% range in the futures market within a day.

On the New York Stock Exchange (NYSE) that day, the Dow Jones Industrial Average closed at 32,803.47, up 76.65 points (0.23%) from the previous session. The S&P 500, centered on large-cap stocks, fell 6.75 points (0.16%) to 4,145.19, while the tech-heavy Nasdaq dropped 64.02 points (0.50%) to 12,657.56.

By sector, a rally in financial stocks was confirmed, supported by expectations of continued Fed rate hikes. JPMorgan Chase closed up 3.03% from the previous session. Wells Fargo (+2.31%), Morgan Stanley (+0.9%), and Goldman Sachs (+0.84%) also rose in unison. Energy stocks rebounded due to rising international oil prices. Schlumberger rose 2.09%, Chevron 1.65%, and ExxonMobil jumped 1.45%. Occidental Petroleum (+2.70%) and Devon Energy (+3.96%) also rallied.

On the other hand, technology stocks sensitive to rate hikes showed weakness. Tesla slid more than 6%, breaking below the 900-dollar mark. Meta (-2.03%), Alphabet (-0.61%), Microsoft (-0.26%), Nvidia (-1.18%), and Apple (-0.14%) also declined. Shares of e-commerce company Amazon fell 1.24% on news of its acquisition of robot vacuum maker iRobot, whose shares soared 19.10%.

Additionally, AMC Entertainment jumped nearly 19% after announcing a special dividend through preferred stock issuance. Virgin Galactic fell more than 17% after delaying its first commercial flight schedule.

Investors focused on the employment report released that day. According to the U.S. Department of Labor's July employment situation report, nonfarm payrolls increased by 528,000 last month, the largest gain in five months since February. Most sectors showed clear job growth. The total number of nonfarm jobs has increased by 22 million compared to April 2020, right after the COVID-19 outbreak, recovering to pre-pandemic levels. The unemployment rate stood at 3.5%, the lowest in half a century.

The employment data significantly exceeding expectations strengthens the view that the Fed will continue aggressive tightening. With inflation persistently high, it is expected that the Federal Open Market Committee (FOMC) will continue large rate hikes at its September regular meeting. Some even speculate the possibility of a third consecutive 'giant step' (0.75 percentage point rate hike).

According to the Chicago Mercantile Exchange (CME) FedWatch, the probability of a giant step in September rose from 34% the previous day to 66.5% on this day. Conversely, the chance of a big step (0.5 percentage point hike), which was 66%, was halved.

Art Hogan, chief market strategist at B. Riley Financial, said, "Those betting on the Fed to pivot and cut rates next year should get off at the next stop because that possibility no longer exists."

This report draws more attention as it comes right after the U.S. economy contracted for two consecutive quarters. For the Biden administration and the Fed, which had dismissed recession concerns by citing a strong labor market, this means easing recession worries and focusing on curbing inflation. President Biden issued a statement regarding the employment report, saying, "More people are working now than at any time in U.S. history," and added, "This is the result of my economic plan to build an economy from the bottom up and broaden the middle class."

With the Fed's rate hikes gaining momentum, the 10-year Treasury yield rose to around 2.8% in the New York bond market. The 2-year yield, sensitive to monetary policy, also surged to 3.2%. However, concerns about recession or economic slowdown persist. The yield curve inversion continues, with short-term 2-year yields exceeding long-term yields, and the yield spread is widening. Such yield curve inversion is generally considered a precursor to recession.

Gold prices came under downward pressure due to the stronger-than-expected employment data. On the New York Commodity Exchange, December gold futures closed at $1,791.20 per ounce, down $15.70 from the previous session. Central bank tightening is typically seen as a negative factor for gold prices.

Oil prices rose. On the New York Mercantile Exchange, September West Texas Intermediate (WTI) crude oil futures closed at $89.01 per barrel, up 47 cents (0.53%) from the previous session. This was due to strong employment data combined with bargain buying following recent declines. WTI has fallen more than 9% just this week.