Shares on Wall Street fell on Wednesday, dampening a strong rally fueled by investors who recovered stocks on cheap and weak economic data, easing fears about rising interest rates.
The broad S&P 500 fell 1% after the opening bell, after ending the previous session up 3.1%. The tech-heavy Nasdaq lost 1.5%. In Europe, the regional Stoxx 500 fell 0.9%.
Tuesday’s moves had taken the S&P’s two-day lead to 5.7% – its biggest such rise since the depths of the coronavirus pandemic in spring 2020 – as some analysts and investors identified opportunities to trading after three consecutive quarters of losses.
Gains accelerated after weaker-than-expected U.S. labor market data released on Tuesday showed the number of job creations in the world’s largest economy fell to 10.1 million in August, below economists’ forecast of 10.8m and the previous month’s figure of 11.2m.
Jobs reports have been closely watched as an indicator of how much and how quickly the US Federal Reserve will tighten monetary policy to curb inflation, with stronger data prompting expectations for more aggressive action and weaker numbers easing concerns about the magnitude of future rate hikes.
Tuesday’s figures were “the first official indicator indicating unambiguously, if not necessarily reliably, a marked slowdown in [labour] demand,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics.
Concerns have intensified in recent months that the Fed and its peers will raise borrowing costs to such an extent that they worsen an economic downturn.
But even as signs of a slowing jobs market ease expectations for a rate hike, Hani Redha, global multi-asset portfolio manager at PineBridge Investments, warned: “The magnitude of the squeeze means that we will see a continued deceleration that will most likely push us into a recession anyway.
Redha said the stock market’s gains over the past two days could be a “bear market rally,” when stocks briefly rally during a longer period of decline.
“As a bear market progresses, the rallies intensify,” he added. “You need more and more volatility for . . . washing long positions [before a more sustainable recovery begins]”.
In government debt markets, UK gilts were hit by another wave of selling, with the 10-year yield adding 0.14 percentage points to trade above 4%. The policy-sensitive two-year yield rose 0.15 percentage points to 4.05%.
The government securities market crashed last week in response to Westminster’s ‘mini’ budget as investors worried about the new chancellor’s proposed tax cuts and sweeping borrowing plans. Selling pressures only eased when the Bank of England stepped in to ease the turbulence.
Other bonds were also under pressure, with the 10-year US Treasury yield rising 0.11 percentage points to 3.73%.
The dollar, which has fallen in recent days on easing expectations for U.S. borrowing costs and a rally in stock markets, gained 1% against a basket of six currencies. ING strategists said they “remain skeptical that the Fed is poised to pivot on the back of slightly weaker US data this week.”
The pound lost more than 1% to trade below $1.13 but remained around levels last seen before British Chancellor Kwasi Kwarteng unveiled the government’s budget plans on September 23.
Asian shares followed U.S. stocks higher on Wednesday, with the Hang Seng index closing up 5.9% on its reopening after a public holiday.