U.S. Markets Little Changed as Jobs Data Keep Fed Bets Alive

(Bloomberg) -- The long-awaited U.S. jobs report did little to sway traders from bets the Federal Reserve will boost rates this year -- leaving stocks, the dollar and bonds little changed as investors turn their attention to the start of the earnings season and key data on the health of consumers.

U.S. equities pared losses in afternoon trading, while the greenback posted a weekly advance after data showing the U.S. labor market is settling into a pace that will support higher borrowing costs. Short-dated Treasuries outperformed longer maturities as investors reduced wagers that a hike would happen as early as November. Oil fell below $50 a barrel after Russia cast doubt over a deal any time soon with OPEC. The pound trimmed its decline after the biggest intraday slide since the Brexit referendum. 

Traders have raised their bets on a Fed hike after reports showed improvement in labor, services and manufacturing. The share of working-age people in the labor force climbed to a six-month high in September and wage growth picked up, while the unemployment rate rose to 5 percent, Labor Department data showed Friday. Now the focus shifts to the strength of corporate America as Alcoa Inc. unofficially kicks off the earnings season and investors sift through retail-sales figures next week.

“There are still signs of overall health in a very tight labor market,” said Tony Bedikian, head of global markets for Citizens Bank in Boston. “This still leaves a likely December hike on the table here.”

Bond traders see a 64 percent probability of a rate increase in December, according to futures data compiled by Bloomberg. Meanwhile, they indicate a 17 percent probability of a rate increase in November, down from about 24 percent before the report’s release.

Fed Vice Chairman Stanley Fischer said job creation was continuing at a pace “fully consistent” with lower unemployment, but continued to contrast with a weak overall economic expansion. Policy makers left rates unchanged in September, though the decision came over the objection of three voters who urged the central bank to move forward with gradual hikes to prevent a tightening labor market from triggering much higher inflation.

Stocks

The S&P 500 Index slipped 0.3 percent to 2,153.74 at 4 p.m. in New York. Industrial shares tumbled as Honeywell International Inc. plunged after profit missed targets. Tyson Foods Inc. retreated after an analyst downgraded the stock while citing a "powerfully convincing" class-action lawsuit.

Stocks posted the first weekly decline in four as investors speculate whether the world’s biggest economy is robust enough to cope with higher borrowing costs.

Bets that a Fed hike is still on the cards this year sent European shares slumping, adding to concern that the region’s policy makers will taper stimulus. By contrast, a gain of 0.9 percent in the FTSE 100 Index put it within 1 percent of its 2015 record close as the pound slide lifted exporters.

Emerging-market stocks trimmed their weekly advance on speculation that a Fed hike will diminish the flow of capital into higher-yielding assets.

Currencies

The Bloomberg Dollar Spot Index, which tracks the currency against 10 major peers, fell 0.2 percent Friday after struggling to find direction when the jobs data came out. It still posted a 1 percent advance for the week.

“This report tells the Fed that jobs growth remains solid supporting a December hike, but the rise in the labor-force-participation rate and range-bound wages suggests they will hike very slowly,” said Ian Gordon, a foreign-exchange strategist at Bank of America Corp. in New York. “It will support expectations for a December hike.”

The U.S. currency has rallied from its 2016 low reached in May on signals of faster economic growth and inflation. Dollar bulls upended by rate-path revisions from the Fed are hanging onto the central bank’s decree that it remains data dependent, and that every policy meeting is "live" for a rate increase.

In the span of just two minutes in early Asia trading on Friday, the British pound had plunged more than 6 percent, sending the fourth most-traded currency on the planet to the lowest level in 31 years. While the currency rebounded from its lows, it still dropped 1.5 percent to $1.2432 as concern welled up that Britain is headed for a so-called hard Brexit that would restrict its access to the European Union’s single market.

Bonds

U.S. two-year note yields, the coupon securities most sensitive to Fed policy expectations, fell two basis points, or 0.02 basis point, 0.83 percent. Meanwhile, 10-year yields dropped one basis point to 1.72 percent.

While the data may dim speculation of a rate hike as soon as the Fed’s Nov. 2 decision, six days before the U.S. presidential election, traders saw little change in the outlook for policy tightening by year-end. Officials repeatedly pared projections for the path of rates this year amid inconsistent U.S. economic data and signs of stalling global growth.

"The steepening trade is being put on in a big fashion -- we have a ridiculously flat curve for this stage of this cycle,” said David Keeble, New York-based head of fixed-income strategy at Credit Agricole SA. “The jobs report may keep the Fed slower for longer" and “definitely takes November off the table."

The extra yield that investors demand to own 30-year bonds instead of two-year notes increased to about 1.62 percentage points. The gap, a measure of the yield curve, has rebounded from about 1.4 percentage points in August, the lowest since 2008.

Commodities

Oil slid 1.3 percent after closing above $50 a barrel on Thursday for the first time since June. OPEC agreed in Algiers last week to reduce the group’s production in a bid to shrink the world’s bloated crude supplies and boost prices. Russia’s Energy Minister Alexander Novak said Friday he doesn’t expect to sign a deal with OPEC during the World Energy Congress next week in Istanbul.

"Talks, talks, and talks -- that has been the baseline over the last week or so," said Tamas Varga, an analyst at PVM Oil Associates Ltd. in London. "There’s no practical indication that OPEC will finally agree, meaning fully and credibly, to cut production at the end of the November meeting."

West Texas Intermediate for November delivery slipped to $49.81 a barrel. on the New York Mercantile Exchange.

--With assistance from Eliza Ronalds-Hannon Susanne Barton Anna-Louise Jackson Andrea Wong Stephen Kirkland and Mark Shenk

To contact the reporters on this story: Rita Nazareth in New York at rnazareth@bloomberg.net, Maciej Onoszko in Toronto at monoszko@bloomberg.net, Dani Burger in New York at dburger7@bloomberg.net.

To contact the editor responsible for this story: Jeremy Herron at jherron8@bloomberg.net, Rita Nazareth