Shares plunge despite strong jobs report as investors fear bigger Fed rate hikes

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The stock market fell Friday after the US economy added a better-than-expected 528,000 jobs in July, with investors now expecting a strong labor market to keep the Federal Reserve on the path of aggressive rate hikes to push inflation back.

Key facts

The Dow Jones Industrial Average fell 0.3%, more than 100 points, in early trading, while the S&P 500 fell 0.6% and the tech-heavy Nasdaq Composite fell 1.0%.

Shares fell despite a strong report on nonfarm payrolls: The labor market added 528,000 jobs in July, well above 258,000 analysts had expected on Friday, according to the Bureau of Labor Statistics.

Unemployment fell to 3.5%, while wage growth continued to pick up, up 0.5 percentage points from the previous month and more than 5 points higher than a year ago, suggesting that inflationary pressures continue.

With the labor market still hot, investors are now concerned that the latest data means the Federal Reserve will continue to raise interest rates aggressively in a bid to curb high inflation.

Following the jobs report, traders are now pricing in another 75 basis point rate hike at the next central bank meeting in September, up from previous expectations of a 50 basis point increase, according to data from the CME Group.

“The reflexive response” in the markets is clearly negative, as the market has “gained steam” in recent weeks from the view that the Fed was on the cusp of a monetary pivot, “but that is clearly not going to happen anytime soon based on this employment report,” said Adam Crisafulli, founder of Vital Knowledge.

Crucial Quote:

“We’re not adding 528k jobs in a month when we’re in a recession. … That’s the good news,” said Cliff Hodge, chief investment officer at Cornerstone Wealth. and the broader economy will keep the Fed on a more aggressive path, especially with wages so high.”

Tangent:

Shares of Tesla fell 5% after shareholders approved a 3:1 stock split late Thursday. It’s the company’s second stock split in about two years: the move aims to make the stock more affordable for retail investors, often helping to boost stock price in the short term. Shares of Tesla are up more than 30% since the announcement of the stock split in June, although it is still down about 25% so far in 2022 amid broader market sell-off.

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