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Booming jobs data doesn’t lift Wall Street, which remains worried about Fed

Equity markets mostly stayed put this week despite a blockbuster jobs report. The reason, many experts believe, is that Wall Street still fears a hawkish Federal Reserve.

MANHATTAN (CN) — Markets took a breather after last week’s rally, with investors worried the red-hot jobs data released Friday means the Federal Reserve will remain hawkish on interest rates.

Overall, U.S. indices treaded water this week. On Monday, equities fell somewhat as tensions between the United States and China increased over House Speaker Nancy Pelosi’s visit to Taiwan, though they rallied back on Wednesday. By Friday's closing bell, the Dow Jones Industrial Average had dropped 44 points from a week ago, while the S&P 500 and Nasdaq gained 14 points and 267 points, respectively.

The biggest news of the week came when the Bureau of Labor Statistics reported Friday that 528,000 jobs were gained last month, over twice as many as analysts had predicted. The report also noted that unemployment dropped to 3.5%, finally reaching the pre-pandemic level, while wages are up 0.5% in July.

Not only that, but previous jobs reports – which have been fairly positive – were also better than originally thought. The BLS revised June’s jobs report upwards by 26,000 jobs to nearly 400,000 jobs gained that month. Even May’s jobs report was revised upwards slightly, by 2,000 jobs. Over the past three months, the U.S. economy has added 1.3 million jobs.

Analysts were thrilled by the news, even if Wall Street didn’t rally on Friday. “We believe this development signals the end of the recent bear market rally,” said John Lynch, chief investment officer at Comerica Wealth Management, noting the S&P has gained 13% since its mid-June lows.

“If you thought the economy was in a recession, you were wrong,” said Morning Consult chief economist John Leer in a statement. “Paired with falling gas prices, the economic outlook for the third quarter starts looking better.”

Such big gains may not be in the cards for future months, since data by the same agency earlier in the week showed job openings decreased by 605,000 in June. The biggest drop in job openings came in retail and the leisure sectors. However, the number of employees quitting their jobs fell slightly off the recent highs earlier in the year, suggesting the Great Resignation may be coming to a halt.

The tight jobs market is certainly good for the U.S. economy, but it also likely means the Federal Reserve will again raise interest rates by 0.75% when it meets again in September.

This week a number of Fed officials continued to push for additional interest rate hikes, with Cleveland Federal Reserve Bank President Loretta Meister telling the Washington Post the central bank has “more work to do” to combat rampant inflation and St. Louis Federal Reserve Bank President James Bullard calling for 1.5% in additional interest rate hikes by the year’s end. In an interview with CNBC, Bullard noted that “we’re not in a recession right now.”

While the Fed’s actions could further slow U.S. growth, many believe it will be short-lived, which has been borne out by the spate of recent positive corporate earnings reports this season.

According to an analysis by FactSet, 87% of companies in the S&P 500 have reported their earnings for the second quarter of 2022, and of those companies, three-fourths have reported earnings per share above estimates. Further, on average companies have reported revenue 3.5% above estimates, which would mark the third-highest revenue surprise percentage seen on the S&P since FactSet began tracking the metric in 2008.

“Although we have been impressed by the resiliency of Corporate America, there is much work to be done on the inflation front,” wrote James Vogt of Tower Bridge Advisors in a note to investors. “The next few months of data will be critical in determining if this bear market is indeed over.”

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