S&P 500 slips as 162,000-job report fuels rate-hike bets

The S&P 500 fell after August payrolls added 162,000 jobs, triple the 55,000 consensus, as traders priced in a Federal Reserve rate hike for September.

The move fit a "Good News is Bad News" regime in which strong data forces investors to price in higher rates, JPMorgan strategists said before the release. The bank projected the S&P 500 would drop 0.5 percent to 1.35 percent if job gains topped 95,000, a scenario it assigned a 10 percent probability.

Treasury yields climbed as rate expectations reset. The policy-sensitive two-year note rose five basis points to 4.38 percent, while the 10-year yield added two basis points to 4.78 percent after touching 4.8 percent. Leisure and hospitality led job growth, while information and financial activities shed positions. Unemployment held at 4.1 percent and labor force participation ticked up to 61.6 percent.

The report reversed a concerning July reading, which the Bureau of Labor Statistics revised from a loss of 23,000 to a gain of 21,000, and lifted June's gain to 31,000. Average hourly earnings rose 0.3 percent from the prior month and 3.1 percent from a year earlier, cooling from 3.2 percent. CME FedWatch showed a toss-up between a hike and no change when the Federal Open Market Committee meets Sept. 15-16.

The stakes are high for equities because a resilient labor market keeps inflation above the Fed's 2 percent target and gives policymakers room to tighten. Fed Chair Kevin Warsh said in his August Jackson Hole speech that "the Fed's predominant focus right now should be on prices." The next test comes Friday, when the Bureau of Labor Statistics releases the consumer price index, which will shape the September decision.

The breadth of the rebound matters as much as the headline. Nine of 14 major industries added workers, led by leisure and hospitality after a July pullback, while government and private education also expanded. Labor force participation climbed to 61.6 percent from 61.4 percent, a level that had touched its lowest since 1976 outside the pandemic in July. Wage growth still trails inflation, which ran at 3.4 percent in July against a 3.1 percent annual gain in average hourly earnings, a gap that keeps real incomes under pressure even as hiring firms up.

For portfolio managers, the report complicates the case for rate cuts that had supported equity valuations through the summer. A separate preliminary benchmark from the BLS last week showed nonfarm employment in March was 79,000 lower than previously estimated, a smaller downward revision than the roughly 900,000 cuts applied in each of the prior two years. That leaves the labor market, in the Fed's view, stable enough to keep policy restrictive until price growth cools toward target.

This article is for informational purposes only and does not constitute investment advice.