After Strong Job Data, the Dow Logs a Record High as Stocks Rise and Treasury Yields Jump

U.S. stocks surged on Friday as fresh signs of strength in the labor market helped ease concerns about a potential recession. The Dow Jones Industrial Average closed at a record high, while the bond market reflected reduced fears of an economic downturn.

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The U.S. employment report for September showed stronger-than-expected job growth, according to Vishal Khanduja, a senior portfolio manager for fixed income at Morgan Stanley Investment Management. In a phone interview, Khanduja remarked that the latest data suggested the Federal Reserve may not need to implement deep recession-level rate cuts. He pointed out that the bond market, in response to the robust jobs report, has scaled back expectations for aggressive cuts to the Fed’s policy interest rate, which many traders had anticipated this year.

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The labor market report, released by the Bureau of Labor Statistics, revealed that the U.S. economy added 254,000 jobs in September. Additionally, the unemployment rate dipped to 4.1%, further reinforcing the positive economic outlook. As a result, Treasury yields rose significantly, with rates on the rise across the bond market. The 2-year Treasury note yield surged 21.8 basis points to 3.929%, marking its highest level since late August and its biggest weekly increase since June 2022. Meanwhile, the yield on the 10-year Treasury note climbed 13.1 basis points to 3.980%, also reaching its highest point since early August and seeing its largest weekly rise in almost a year.

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Khanduja expressed confidence that the U.S. economy is heading toward a "soft landing" rather than the harder economic downturn that had been predicted by some. He suggested that while the Federal Reserve is likely to reduce interest rates two more times this year, it will probably do so in smaller increments of a quarter percentage point each time. This follows a half-point reduction that initiated the Fed’s rate-cutting cycle last month. With inflation trending downward, the Fed is in the process of recalibrating its monetary policy, aiming to achieve a balance between supporting economic growth and containing inflation.

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Investors are keeping a close eye on inflation, and a key indicator, the consumer-price index (CPI) for September, is set to be released next week. This report will provide more insight into how inflation is evolving and could influence the Fed’s future rate decisions.

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Despite the Fed’s ongoing rate cuts, interest rates remain elevated, leaving bond yields at attractive levels for investors. According to Khanduja, assuming inflation continues to be tamed, bonds should offer both income and portfolio diversification. This could be especially beneficial in times of market volatility or economic uncertainty, helping to protect investments.

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In addition to domestic economic developments, investors are also monitoring the situation in the Middle East, particularly tensions between Israel and Iran. Concerns are rising that Israel may retaliate against Iran following a missile attack earlier in the week, with geopolitical risks potentially impacting markets. U.S. President Joe Biden suggested that Israel consider alternative strategies to striking Iranian oil fields, a comment that highlights the delicate nature of the situation. These geopolitical concerns have also bolstered the aerospace and defense sectors, with exchange-traded funds (ETFs) tied to these industries outperforming the broader market as fears of conflict intensify.

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Amid these various factors, U.S. stocks finished higher on Friday, capping off a strong week. The Dow Jones Industrial Average rose by 0.8%, marking its 34th record close of the year. The S&P 500 gained 0.9%, while the Nasdaq Composite, which is known for its heavy concentration of technology stocks, jumped 1.2%. All three major indexes closed the week with their fourth consecutive weekly gains. The S&P 500 edged up by 0.2% for the week, while the Dow and Nasdaq each posted modest weekly gains of 0.1%.

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Barclays analysts noted in a Friday research report that the stronger-than-expected jobs report weakens the argument for aggressive rate cuts by the Federal Reserve. The report indicates that labor demand remains resilient, contradicting widespread views that the labor market was losing momentum. Barclays now expects the Fed to cut rates by a quarter point at each of its remaining policy meetings this year, in November and December, aligning with expectations in the federal-funds futures market. Following the jobs report, traders increased the probability of such a rate path being followed.

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Rick Rieder, BlackRock’s chief investment officer of global fixed income, commented that the strong labor data suggests a moderation in hiring after the rapid post-pandemic recovery. He believes the Fed will continue to lower rates, but at a more measured pace than previously expected. Instead of the near-term half-point cuts the market had been pricing in, Rieder anticipates that the Fed will proceed with quarter-point reductions.

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In summary, the U.S. labor market’s strength and the Fed’s cautious approach to rate cuts have boosted investor confidence, pushing U.S. stocks higher and calming fears of an impending recession. With inflation trending lower and bond yields offering attractive returns, the market appears to be stabilizing, although geopolitical risks and inflation data remain key factors to watch in the coming weeks.

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