U.S. stocks mostly higher as unemployment rate rise seen putting Fed rate hikes on pause

What’s happening

• The Dow Jones Industrial Average
  DJIA
  was up 81 points, or 0.2%
• The S&P 500
  SPX
  was up 8 points, or 0.2%
• The Nasdaq Composite
  COMP
  was off 2 points, or less than 0.1%, at 14,031.

The S&P 500 fell 1.8% in August, while the Nasdaq shed 2.2%, the first monthly decline for both indexes since February. The Dow fell 2.4% after back-to-back monthly gains.

What’s driving the market

The Labor Department said the U.S. economy added 187,000 jobs in August, topping economist expectations for a gain of 170,000 but still affirming a slowdown in the pace of job gains that’s likely to be welcomed by the Federal Reserve. The unemployment rate jumped to 3.8% from 3.5% in July.

Hourly wages rose 0.2% in August. The increase in pay over the past year fell a tick to 4.3%. Fed officials want to see wage growth slow to prepandemic levels of 3% or less.

“Unemployment jumping from 3.5% to 3.8% takes pressure off the Fed,” said Bryce Doty, senior portfolio manager at Sit Investment Associates. “The yield curve will continue to un-invert with 2 year yields declining as investors build in a shift in Fed policy. All this despite a slightly higher number [of] jobs than expected, but downward revisions to previous months more than offset the positive absolute jobs number.”

“Earnings were soft as well; only rising 0.2%. But the rise in the unemployment rate will steal the show,” he said.

Policy makers will want to see the trend continue, however.

“To be clear, the Fed won’t get carried away with today’s report. It’s just one that needs to be repeated on a number of occasions but there’s plenty of cause for optimism in there,” said Craig Erlam, senior market analyst at Oanda, in a note.

“If there was any doubt that the Fed will pause in September, today’s report surely puts an end to that debate,” he wrote.

Stocks initially trimmed gains after remarks by Cleveland Fed President Loretta Mester, which saw Treasury yields turn mostly higher.

“Although there has been some progress, inflation remains too high,” Mester said, at an ECB research conference.

Equities regained their footing, but then lost steam ahead of midday. Volume was expected to be light over the remainder of the session ahead of the three-day weekend.

Fed officials are trying to gauge whether the current level of the Fed’s fed funds benchmark rate “is sufficiently restrictive and how long policy will need to remain restrictive to keep inflation moving down,” Mester said.

Future policy decisions will be about managing the risks of over-tightening versus under-tightening monetary policy, she said.

MarketWatch Live: Coverage of the August jobs report and the market reaction

In other data, a closely watched index that measures U.S. manufacturing activity rose 1.2 points to 47.6% in August, according to the Institute for Supply Management on Friday. Economists surveyed by The Wall Street Journal had forecast the index to rise to 46.6%. A reading below 50% indicates a contraction in activity.

Thursday’s after hours releases saw mixed responses, with Dell Technologies Inc.
DELL,
+22.07%
stock rallying but Broadcom Inc. shares
AVGO,
-5.55%
wilting after results.

In China, August Caixin manufacturing PMI came in above expectations, rising to 51, a level that indicates improving conditions, as the country also lowered down-payment requirements on homes. The Hong Kong market was shut as Typhoon Saola was expected to make landfall on Friday.

Companies in focus

• Walgreens Boots Alliance Inc.
  WBA,
  -5.43%
  shares fell more than 5%, after ending at a 14-year closing low on Thursday. The drugstore chain and healthcare services company said Chief Executive Rosalind Brewer has stepped down after 2 1/2-years in the role.

• Dell Technologies Inc. stock jumped 23.4% after the technology giant posted sizable beats on profit and revenue.

• Broadcom Inc. shares fell 5.2% after the chip and software company delivered a revenue forecast for the current quarter that failed to offer upside versus the consensus view.

• Lululemon Athletica
  LULU,
  +5.37%
  reported same-stores sales that missed expectations, but the yoga-themed apparel maker bumped its full-year forecast higher. Shares were up 4%.

• Tesla Inc. stock
  TSLA,
  -4.33%
  slipped 3.6% after the EV maker announced fresh price cuts for its Model S and Model X cars in China, two weeks after having lowered prices on those premium vehicles.