MANHATTAN (CN) — Spurred by fears of further interest rate hikes by the Federal Reserve, investors were first encouraged by mediocre employment data on Thursday and then dismayed by stronger a jobs report on Friday, causing markets to dip slightly for the week.
By the closing bell on Friday, the Dow Jones Industrial Average fell a total of 314 points this week, while the S&P 500 and Nasdaq lost 50 points and 119 points for the week, respectively. Nearly all of the losses came on Friday, following the second of two jobs reports.
The day prior, Wall Street looked primed for another winning week as investors rallied in the wake of a troubling earnings report from Microsoft and disappointing ADP report, the latter of which showed only 128,000 jobs gained last month. By Thursday’s closing bell, the Dow gained 435 points and the S&P netted 75 points.
The ADP report, which is discounted by some analysts as a “public relations stunt” and not a true indicator of job gains or losses, noted a 91,000 loss in employment among small firms, though mid-sized and large companies gained about 100,000 jobs each.
Some say markets viewed the ADP report much as Goldilocks would: It was just strong enough. In an investor’s note Friday morning, Tom Essaye of the Sevens Report noted that “very strong data would incur more Fed hawkishness while really soft data would spike stagflation concerns — and ‘moderating’ was just what we got from the ADP jobs report.”
Essaye added further declines in job gains versus what analysts predict would provide justification for the Federal Reserve to back off its plan to hike interest rates by 50 basis points during each of the next several meetings.
On Friday, however, investors hoping for a slowing labor market were disappointed as the U.S. Bureau of Labor Statistics reported that nonfarm payroll employment increased by 390,000 in May, several thousands above the analyst prediction of around 320,000. The only weak spot at all on the report was the 61,000-job drop in the retail sector, though analysts peg that decline on the troubles affecting big box stores like Target and Walmart.
May’s job gains are a decrease from April’s jobs report, but the report also splashes cold water on the idea that the United States is experiencing stagflation or is on the cusp of a recession. “Jobs growth slowed in May, but that doesn’t mean a recession this year is inevitable,” John Leer, chief economist at the Morning Consult, said in a statement. “A slowdown in jobs growth is very different from Americans losing their jobs.”
The report also showed the unemployment rate unchanged for the third month in a row, hovering at 3.6%, just a smidge above the 3.5% rate in February 2020 before the Covid-19 pandemic fully struck the United States. The labor force participation also inched upward, from 62.2% in April to 62.3% last month.
For some analysts, though, the positive unemployment data point is cold comfort for some analysts. “The long-term unemployed account for roughly 23% of all unemployed persons and should be a concern as ‘skill entropy’ sets in for those out of work for an extended period,” said Jeffrey Roach, chief economist at LPL Financial, adding, though, that the overall report shows a tight labor market. “Therefore, the Federal Reserve can continue to tighten financial conditions and remove the historic level of accommodation in the markets.”
So far, the Fed now shows signs of backing off the summer’s anticipated interest rate hikes, which is largely blamed for the recent drop in equities.
On Tuesday, President Biden — whose public approval ratings are now lower than former President Trump’s due to price increases — met with Fed Chair Jerome Powell to discuss inflation. During the meeting, Biden reportedly said he and the Fed remain “laser-focused” on addressing inflation.
Even so, there remains only so much Biden, or any other president, can do to combat inflation. According to an analysis by Libby Cantrill and Allison Boxer of Pimco, Biden could shave about 0.3% off the consumer price index if he removed all of the tariffs on China imposed by his predecessor. Efforts to lower food and drug prices also are likely to be long-term solutions and would not materialize for many months, they wrote. “The cold reality is that outside of the Fed and Congress, there is not much the White House can do to really move the needle on inflation,” they wrote.
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