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Massive market correction barrels on, though midweek volatility eases losses

Another positive jobs report and calming statements by the Federal Reserve should have smoothed things out for investors, but markets took on wild market swings to continue a losing streak.

MANHATTAN (CN) — Wild swings on Wall Street mitigated the worst of another losing week.

The main theme of the week has been volatility, with wild trading on Monday, followed by similarly large gains on Wednesday that were then muted by major declines on Thursday and Friday. By the week’s end the Dow Jones Industrial Average had lost 76 points, while the S&P 500 declined just 8 points and the Nasdaq fell 190 points for the week.

“In the end, one outrageous decline erased, and then some, an outrageous rally, and we’re left with an S&P 500 that’s down from Wednesday but still above the Monday lows,” wrote Tom Essaye of the Sevens Report. He added he continues to “expect high volatility, but pessimism is extreme, and a lot of negatives are priced in at these levels.”

Most of the volatile swings on Wall Street matched the economic news cycle, including another positive jobs report released on Friday. In the report, the U.S. Bureau of Labor Statistics found non-farm payroll employment increased by 428,000 last month, slightly above analyst expectations.

Jobs reports have become a bit of a Rorschach test for analysts, with bulls seeing it as evidence of a robust economy and bears fretting over wage growth keeping pace with inflation.

“The April employment report has something for everyone,” said John Lynch, chief investment officer at Comerica Wealth Management. “Job creation in April was better than expected, the unemployment rate was unchanged, and average hourly earnings growth declined from previous months.”

Lynch suggests the balanced jobs report may help “dampen the extreme volatility of recent days” but noted “we’re still not out of the woods.”

The U.S. Chamber of Commerce, which doesn’t comment on every BLS jobs report, was quick to note the labor force participation rate declined to 62.2% in April as 363,000 employees left the workforce. “The U.S. now has nearly double the number of open jobs that we have available workers,” Neil Bradley, the group’s lead lobbyist, said in a statement. “This is unprecedented to have this kind of extreme mismatch between open jobs and people to fill those jobs.”

Others see the BLS data as confirmation the Federal Reserve was correct to ignore recent data suggesting stagflation.  “Admittedly, we expect employment growth to slow this year, but fears of an imminent recession, which has been amplified by the latest bout of weakness in equities, are overblow,” Paul Ashworth, chief North America economist at Capital Economics, wrote in an investor’s note.

Ashworth added that the Fed also will likely still need to keep the foot on the gas for its interest hikes. “Unless productivity rebounds, which is unlikely when job growth is being driven by low-productivity sectors like leisure and hospitality, the Fed will have to keep hiking interest rates,” he wrote.  

So far, the Fed has remained in its lane and at a steady speed. On Wednesday, the Federal Reserve again raised interest rates by 0.5%, the biggest increase by the central bank in two decades but one that was widely expected by investors. The overnight federal funds rate now stands at the 0.75% to 1% range.

The Fed also announced an acceleration of its sale of the trillions of dollars in asset-backed securities on its balance sheet, increasing its sell-off to $95 billion per month for Treasuries and mortgage-backed securities.

During the first in-person press conference in years, Fed Chair Jerome Powell tried to assure consumers and investors alike the central bank was not considering rate hikes higher than 0.5%. “A 75-basis-point increase is not something the committee is actively considering,” he told reporters, adding “there is a broad sense on the committee that additional 50-basis-point increases should be on the table for the next couple of meetings.”

Powell also said the current economy is “very, very strong” and able to accommodate tighter monetary policy. He noted the overall strength of labor market being justification for his belief that “there is a good chance to have a soft, or a softish landing” despite the overarching threat of runaway inflation.

“It is essential that we bring inflation down if we are to have a sustained period of strong labor market conditions that benefit all,” Powell said, later adding that “inflation has obviously surprised the upside over the past year.

Following the Fed’s announcement, markets gained significantly after trading ended on Wednesday — the S&P 500 saw its biggest increase since May 2020 — and bond yields declined. But the joy was short-lived as indices once again plummeted on Thursday and the Dow suffered its worst one-day rout since 2020, losing more than 1,000 points.

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