Stocks dropped before the open Friday as investors assessed the US monthly jobs report, which could make or sink the case for the Federal Reserve to start cutting interest rates.
Dow Jones Industrial Average (^DJI) futures were down about 0.4%, while S&P 500 (^GSPC) futures were around 0.3% lower. Contracts on the tech-heavy Nasdaq 100 (^NDX) sank almost 0.8%.
The US unemployment rate fell unexpectedly to 3.7% in November, the nonfarm-payrolls report showed, reflecting signs that the labor market may not be cooling as quickly as many had initially thought.
Meanwhile, the economy added 199,000 jobs, up from the previous month’s reading when striking auto workers and Hollywood actors came back to the workforce.
The report will serve as a test for stocks, which rallied as investors grew optimistic that the Fed’s rate hikes have peaked and a “soft landing” for the US economy is on the cards. Hints of labor market cooling in earlier data this week were taken as a the Fed’s inflation fight is paying off.
Read more: What the Fed rate-hike pause means for bank accounts, CDs, loans, and credit cards
Elsewhere, the UK antitrust regulator said Friday it will examine OpenAI’s partnership with Microsoft (MSFT) for a potential merger probe. The move comes after AI buzz boosted tech stocks on Thursday, with gains for Alphabet (GOOGL) and AMD (AMD) after they introduced products.
In commodities, oil prices bounced back but are still on course for the longest run of losses in five years as the market weighs whether extra OPEC+ cuts will fend off a global glut. West Texas Intermediate (CL=F) futures and Brent (BZ=F) crude futures were both more than 2% higher.
Fed rate bets are on the move
As expected, Friday’s hotter-than-expected jobs report is already having an impact on how traders expect the Federal Reserve to behave in the year ahead.
Odds the Fed will cut rates in January dropped sharply early Friday — to 4% from 15% on Thursday, according to data from the CME Group.
Looking out to March, which is when many economists expect to see the Fed begin its rate cuts, odds rates are down 25 basis points from current levels have dropped to 45% from 55% yesterday. The odds 50 basis points have been taken off the Fed funds rate by March are down to 3% from 9% as of Thursday.
Next Tuesday’s inflation numbers will be the next chance for these expectations to recalibrate, but the read-through from Friday’s report is clear: the Fed has wanted to be patient and can likely remain so.
November jobs report takes pressure off the Fed
The US economy added 199,000 jobs in November while the unemployment rate unexpectedly fell to 3.7%, taking pressure off the Federal Reserve to ease interest rates early next year.
Economists had been looking for unemployment to hold steady at 3.9%.
Wage gains in November rose more than expected over the prior month — up 0.4% vs. 0.3% expected — but moderated on an annual basis to 4%, in-line with estimates but down from October’s 4.1% annual increase.
Wage growth slowing while the economy continues to add jobs will likely bolster the Fed’s view that a soft landing is coming into focus for 2024.
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