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U.S. stock and bond prices rose on Friday after a major hiring slowdown raised investor expectations that interest rates have peaked.
U.S. employers added 150,000 new jobs last month — fewer than forecast and barely half of September’s revised figure of 297,000. Economists polled by Bloomberg had expected a total of 180,000 new jobs for October.
The data provided further fuel for a rally in US government bonds as investors bet that the slowdown in the labor market made it more likely that the US Federal Reserve would not raise interest rates further in coming months.
The S&P 500 rose 1 percent in early afternoon trading, putting the stock index on track for its best week in a year. So far this week, it’s up 5.9 percent.
“This jobs report is . . . It helps convince non-believers that this is effectively the end of the rate hike cycle,” said Kristina Hooper, chief global markets strategist at Invesco. “We are really in a disinflationary trend, the economy is cooling and the Fed does not need to raise rates again.”
Steve Sosnick, chief market strategist at Interactive Brokers, added that stock markets were “hypersensitive to any hint” that central bank policy would be less tight than previously thought.
He added that while stock markets are slow to respond to restrictive measures from central banks, they often respond more quickly to a more dovish stance, as this implies that financing will soon become cheaper.
Futures markets trade after jobs data suggested investors now expect a rate cut in June, up from their previous expectations of a cut in July. Traders also retreated further from expectations of a further rate hike this year.
The yield on the two-year U.S. Treasury bond, which moves opposite to price and tracks interest rate expectations, fell to a two-month low of 4.86 percent.
According to data from the Bureau of Labor Statistics, the U.S. unemployment rate rose to 3.9 percent in October from 3.8 percent in September. Average profits rose slightly by 0.2 percent, a slight slowdown from the previous month’s 0.3 percent increase.
Economists said the strike action by autoworkers had likely reduced the total number of new jobs in October by about 30,000, but underlying data still suggested hiring had slowed.
The figure for new jobs in August was also revised downwards by 62,000 to 165,000.
US President Joe Biden reacted optimistically to the data, highlighting that unemployment has remained below 4 percent for 21 months in a row, the longest stretch in more than 50 years.
Job growth is a key indicator for investors and Fed rate setters, who are watching the labor market for indications that the central bank’s tightening campaign is cooling the economy.
The Fed raised interest rates from near zero to a target range of 5.25 percent to 5.5 percent in March last year in an effort to reduce inflation.
But rates were held steady on Wednesday and they, along with other central banks, are widely expected to keep borrowing costs at current levels for some time to come.
Wylie Tollette, chief investment officer at Franklin Templeton Investment Solutions, said Friday’s jobs report was “probably exactly what the Fed was looking for.” But he warned that the “market might get a little ahead of itself”, arguing that the central bank was unlikely to cut rates “until the end of 2024 or even possibly until 2025”.
After the data publication, the yield on ten-year government bonds, which is moving in line with growth expectations, fell to the lowest level since mid-October, by 0.15 percentage points to 4.53 percent.
Thomas Barkin, chairman of the Richmond Fed, told CNBC on Friday that it was not yet clear whether rates had peaked, adding that the timing of possible rate cuts was “still a long way off in my mind.”
Dean Maki, chief economist at Point72 Asset Management, warned that the recent rally in government bonds and the stock market’s rise were easing financial conditions that could “in principle make the Fed more nervous about picking up economic growth again.”
This week’s rally marked the biggest two-day decline in 10-year Treasury yields since the US banking crisis of early March.
Investors highlighted comments from Fed Chairman Jay Powell that the central bank was “proceeding cautiously” on future rate hikes, which some took as a sign that borrowing costs have already succeeded in slowing the U.S. economy.
Additional reporting by Kate Duguid