Markets fall on good employment data, then rise on good employment data

MANHATTAN (CN) — Investors pared back in equities each of the first four days this week, even as positive news rolled in on jobs, interest rates and the banking crisis. It was only on Friday, when the government’s employment report surprised analysts, that markets rallied.

On Friday, investors were surprised to learn that the U.S. economy gained 253,000 jobs last month, according to the monthly report by the U.S. Bureau of Labor Statistics, well above the forecast of about 180,000 jobs. The unemployment rate is now 3.4%, the lowest it has been since the late 1960s.

Markets reacted positively to the news, making up losses from earlier in the week. The Dow Jones Industrial Average, which gained 549 points on Friday, finished the week down 421 points. The S&P 500 and Nasdaq, which saw similar increases following the jobs report, closed the week down 9 points and 33 points, respectively.   

Analysts are still split about the good news, though. “While the normally positive news in the jobs market would be great for markets, given that we are in the middle of an inflationary regime, it only increases the likelihood that the Fed will need to keep rates higher for longer,” said Chris Zaccarelli, chief investment officer at the Independent Advisor Alliance.

“The April employment report showed that while jobs growth remains solid enough, it is still trending lower, and the surveys suggest activity growth is slowing too,” Andrew Hunter, deputy chief U.S. economist at Capital Economics, wrote in an investor’s note. “With ongoing concerns over regional banks looking more likely to result in a further economic drag, we think a sharper downtown is coming.

The BLS jobs report tracks closely to payroll company ADP’s own employment report released earlier in the week, which showed 296,000 jobs gained last month. Nearly all of the jobs were from the services sector, and the Northeast and Midwest regions saw the biggest increases. The gains were balanced by 100,000 jobs lost in the South, and wage increases slowed from 14.2% in March to 13.2%, the slowest gain of growth since late 2021.

“The slowdown in pay growth gives the clearest signal of what’s going on in the labor market right now,” Nela Richardson, ADP’s chief economist, said in a statement. “Employers are hiring aggressively while holding pay gains in check as workers come off the sidelines. Our data also shows fewer people are switching jobs.”

Additionally, prior to Friday markets reacted with a shrug to the other big news of the week: the announcement on Wednesday from the Federal Reserve that it would raise interest rates by 0.25%. This marks the 10th consecutive rate hike since March 2022, when the Fed began its quest to bring down inflation, and the federal funds rate currently sits at 5% to 5.25%.

During the press conference following the announcement, Chair Jerome Powell said no official decision was made on whether to pause rate hikes going forward, but stressed the Fed commentary had excluded language that “additional policy firming may be appropriate.”

Powell’s comments about inflation not coming down quickly enough also hinted, however, at no cut rates this year. “If that forecast is broadly right, it would not be appropriate to cut rates, and we won’t cut rates,” Zaccarelli said, adding that in non-housing services inflation “really, really hasn’t moved much.”

Many on Wall Street still believe the Fed will cut rates later this year if a recession hits the U.S. economy and are banking Powell is being characteristically reserved in his comments.

“Powell won’t blink,” said Gina Bolvin, president at Bolvin Wealth Management Group. "But the market is pricing in rate cuts by the end of the year, so the tug of war between the two — Powell and investors — continues. The remaining question is how much the regional bank crisis and credit crunch will slow the economy.”

Powell spoke about both the banking crisis and a potential recession during his presser. On the former, he said he believes U.S. economy will stick a soft landing. “I continue to think that it’s possible that this time is really different,” he said, pointing to the excess demand in the labor market. “It’s possible that we can continue to have cooling in the labor market without having the big increases in unemployment that have gone with many, you know, prior episodes.”

The week began with the banking crisis on everybody’s minds, as the beleaguered First Republic Bank was taken over by JP Morgan Chase. The deal — which reportedly would dock the federal government’s banking insurance fund $13 billion — granted nervous bank-watchers a sigh of relief but does not guarantee the credit crisis will not metastasize to other midlevel banks.

“I’m not aware of anybody thinking that this could happen quite so quickly,” Powell said of Silicon Valley’s collapse, adding it is “clear that we need to strengthen both supervision and regulations for banks of this size.”

Abroad, other central banks also slowed their rate increases. On Thursday, the European Central Bank raised rates by 25 basis points, bringing its interest rate to 3.25%. “The inflation outlook continues to be too high for too long,” the central bank said in a statement. “Headline inflation has declined over recent months, but underlying price pressures remain strong.”

Unlike the Fed, however, the ECB did not indicate whether it would continue to raise rates later this year. “The Governing Council’s future decisions will ensure that the policy rates will be brought to levels sufficiently restrictive to achieve a timely return of inflation to the 2% medium-term target and will be kept at those levels for as long as necessary,” it noted.

Zaccarelli said that central banks have the unenviable task of trying to thread the needle between recession and inflation. “A slowing economy that is not too hot and not too cold is the goal, but like most fairy tales, it’s not likely to come true,” he said. “The longer the Fed has to keep rates this high, the more likely we risk a financial market accident or crash in the economy, and that’s what keeps us up at night.”

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