Stocks fell this week as investors continued trading in risk-off mode after last Friday’s hawkish speech by Fed Chair Jerome Powell, with a late Friday boost to the negative sentiment courtesy of Vladamir Putin.
The speech underscored the expected stance; aggressive rate hikes, watching the economy holistically, and that they are comfortable slowing the economy to bring inflation back under control.
This means better-than-expected economic reports can merit bearish reactions, as strengths in the economy mean that the Fed has more room to raise rates aggressively.
This was the story of Tuesday when July’s Job Opening report underscored a hot labor market as openings remained high at 11.239 million openings and June job openings received a large upward revision.
However, the biggest report of the week, the August Jobs Report, kicked off Friday telling a more favorable story that led traders in the rates market to pare bets on the amount of policy tightening they expect from the Fed. Odds are about even between a half point and a three-quarter point rate hike on September 21.
The report seemed to be right in the Goldilocks zone as job growth was higher than expected, but the unemployment rate rose and wage growth remained steady.
The higher job growth was a good thing, as it’s good to keep some wiggle room for the Fed to further slow the economy.
However, the rising unemployment rate shows more people joining the labor force. New workers joining the labor force may be partially responsible for the slow down in wage growth.
For the Federal Reserve, the cherry on top here was that slowing wage growth which is good because we already know that the Fed is keeping on the potential for an inflationary wage-price spiral.
The early-day optimism was more than erased later on Friday when Russian gas giant Gazprom announced that it will not reopen the Nordstream 1 pipeline that carries natural gas to Europe as expected on Saturday. Gazprom said it found a new issue that needs to be addressed, but coming hours after the G=7 announced global price caps on Russian oil, the timing seems suspicious.
The announcement sent stocks back toward their lows for the week as it hit a market with pretty low volume ahead of a holiday weekend.
Labor market and geopolitics aside, Consumer Confidence, Manufacturing, and earnings all played a role this week.
ISM Manufacturing Index
The manufacturing report was better than expected for August. Manufacturing expanded at a faster pace than expected as it maintained pace with July at a reading of 52.8%.
Manufacturing activity slowed in August with production falling to a reading of 50.4%, however, prices plunged to a reading of 52.5% from 60%.
The consumer confidence report was mixed for August. Confidence rose more than expected to a reading of 103.2, but the Expectations index - while jumping nearly 10 points to a reading of 75.1 remained below 80 which historically has suggested an elevated risk of recession.
All told, stocks fell this week. The S&P 500 fell 3.29%, while the Dow dropped 2.99%. The Nasdaq faced a 4.21% slide while the Russell 2000 plunged 4.99%.