It is a long time in market terms until late September, but Friday s red-hot July jobs report has traders penciling in a third 75 basis point rise by the Federal Reserve at their next meeting.
The Fed-funds futures reflect a 67% chance that the Federal Open Market Committee would move the rate up by 75 basis points, or 0.75 percentage point, when it ends its two-day meeting on Sept. 21. That is up from a 34% probability that was priced in Thursday.
The strength of today's number leaves the base case assumption that the Fed would probably have to do another 75 bps basis points rate hike from here unless the CPI report shows weakness, which seems highly unlikely at this point, said Rick Rieder, chief investment officer of global fixed income at BlackRock Inc. and head of the global allocation investment team.
Rieder is talking about the consumer-price index due Wednesday.
The Labor Department said the U.S. economy added 528,000 jobs in July, while the unemployment rate fell to 3.5% from 3.6%. Economists surveyed by The Wall Street Journal had predicted a 258,000 increase.
The Fed delivered a 75 basis point hike last month, after it delivered its first increase of that magnitude since 1994. It was its first outsize rise since 2002, as well as a 25 basis point increase in March, following a 50 basis point hike in May.
The fed-funds rate will go high, but traders still look for rates to fall in 2023, as they lifted expectations on how high it will go. Hawkish remarks by Federal Reserve officials over the past week have been described as an attempt to push back against expectations for such a policy pivot by the central bank.
It made for a wobbly performance for stocks, while Treasurys sold off sharply, particularly at the short end of the curve. Equities went up around 8 points in late trade, while the S&P 500 SPX was down 0.4%, despite the Dow Jones Industrial Average DJIA having fallen by around 8 points in a knee-jerk reaction to the data.
Louis Navellier, founder of Navellier Associates, said that while a strong jobs report sounds like good news of a healthy and growing economy, it also means that the Fed will be comfortable raising rates aggressively to tame inflation.
The 2 year U.S. Treasury yield went 19 bps to 3.22% this morning, as a 75 bps hike by the Fed in September is back on the table. Navellier said that the forecasts for the Fed pivoting and cutting rates next spring in response to a slowing economy have been kicked down the road.
He said that it is an environment in which investors should look to reduce exposure to stocks with very high price-to- earnings ratios on rallies and to buy quality growth stocks on the dip.
The stock market bounced back in July after its June lows, but investors are weighing whether it is a bear market head fake or the beginning of a new bull market.
Quincy Krosby, chief global strategist at LPL Financial argued that the Fed s need to continue the fight to achieve price stability means the bottoming process isn't finished.
The June low provided an attractive trading bottom, now the market needs to wait for the bottom, she said in emailed comments. The market is worried about the strength of the labor report, and futures are showing that the Fed isn't finished and neither is the Bear.