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Market Extra: A red-hot July jobs number has traders penciling in another jumbo Fed rate hike

It’s a long time in market terms until late September, but Friday’s red-hot July jobs report has traders penciling in a third 75 basis point rate rise by the Federal Reserve at their next meeting.

Fed-funds futures reflect a 67% probability the Federal Open Market Committee would move the rate up by 75 basis points, or 0.75 percentage point, when it concludes a two-day meeting on Sept. 21. That’s up from a 34% probability that was priced in Thursday.

“The strength of today’s number leaves the base case assumption that the Fed would probably have to do another 75-bps (basis points) rate hike from here unless the CPI report shows some dramatic weakness, which seems highly unlikely at this point,” said Rick Rieder, chief investment officer of global fixed income at BlackRock Inc.’s and head of the BlackRock global allocation investment team.

Rieder was referring to the July consumer-price index, due Wednesday.

The Labor Department on Friday said the U.S. economy added 528,000 jobs in July, while the unemployment rate slipped to 3.5% from 3.6%. Economists surveyed by The Wall Street Journal had forecast a 258,000 increase.

The Fed delivered a 75 basis point hike last month after delivering in June its first increase of that magnitude since 1994. That followed a 50 basis point hike in May, which was its first such outsize rise since 2002, and a 25 basis point rise in March.

Traders also lifted expectations on how the high the fed-funds rate will ultimately go but continue to look for rates to eventually begin falling in 2023. Hawkish remarks by Federal Reserve officials in the past week have been described by analysts as an attempt to push back against expectations for such a policy “pivot” by the central bank.

It all made for a wobbly performance for stocks, while Treasurys sold off sharply, particularly at the short end of the curve. Equities tumbled in a knee-jerk reaction to the data, but then trimmed or erased losses, with the Dow Jones Industrial Average
DJIA,
+0.23%

up around 8 points in late trade, while the S&P 500
SPX,
-0.16%

remained down 0.4%.

While a strong jobs report “sounds like good news of a healthy and growing economy, it also means that the Fed will be comfortable raising rates aggressively to tame inflation,” said Louis Navellier, founder of Navellier & Associates, in a note.

“This concern is best reflected in the 2-year U.S. Treasury yield popping 19bps to 3.22% this morning as a 75bps hike by the Fed in September is back on the table. Likewise, forecasts for the Fed pivoting and cutting rates next spring in response to a slowing economy have been kicked down the road,” Navellier said.

It’s an environment, he argued that should favor buying quality growth stocks “on the dip,” while investors should look to reduce exposure to stocks with very high price-to-earnings ratios on rallies.

Meanwhile, investors are weighing whether the stock market’s strong July bounce off its June lows marks another bear-market head fake or the start of a new bull market.

Quincy Krosby, chief global strategist at LPL Financial, argued that the Fed’s need to continue the fight to achieve price stability means the bottoming process probably isn’t finished.

The June “low provided an attractive trading bottom, now the market needs to wait for ‘the’ bottom,” she said in emailed comments. “Futures are showing the market is worried about the strength of the labor report, and it should be — the Fed isn’t finished and neither is the Bear.”

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