The U.S Stock Market Rallies as the August Unemployment Rate Rises, Putting the Expectations for a Fed Rate Hike on Hold

U.S. equities displayed upward momentum on Friday, as the latest job data for August provided reassurance to investors that the Federal Reserve is unlikely to aggressively raise interest rates. This positive development coincided with the approach of a three-day weekend, as U.S. markets are set to be closed on Monday in observance of Labor Day.

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Here's a snapshot of the market activity:

• The Dow Jones Industrial Average (DJIA) advanced by 186 points, equivalent to a 0.5% gain, reaching 34,908.
• The S&P 500 (SPX) registered a rise of 20 points, or 0.4%, positioning itself at 4,528.
• The Nasdaq Composite (COMP) experienced a gain of 33 points, equal to a 0.2% increase, trading at 14,068.

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The month of August witnessed some downward pressure, with the S&P 500 declining by 1.8% and the Nasdaq experiencing a 2.2% drop. This marked the first monthly decline for both indices since February, while the Dow saw a 2.4% decrease following consecutive monthly gains.

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The key driver behind the market's sentiment was the release of employment data by the Labor Department. The report revealed that the U.S. economy added 187,000 jobs in August, surpassing economists' expectations for a gain of 170,000. However, it also indicated a slowdown in the pace of job growth, which is likely to align with the Federal Reserve's objectives. The unemployment rate inched up from 3.5% in July to 3.8%.

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Hourly wages exhibited a modest 0.2% increase in August, with year-on-year pay growth dipping slightly to 4.3%. The Fed aims to see wage growth return to pre-pandemic levels of 3% or less.

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Bryce Doty, Senior Portfolio Manager at Sit Investment Associates, commented on the situation, stating, "Unemployment jumping from 3.5% to 3.8% takes pressure off the Fed. 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."

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Policy makers will monitor the continuity of this trend, but the Fed is not expected to rush any decisions. Craig Erlam, Senior Market Analyst at Oanda, noted, "If there was any doubt that the Fed will pause in September, today’s report surely puts an end to that debate."

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Market sentiment briefly wavered following remarks by Cleveland Fed President Loretta Mester, which led to a rise in Treasury yields. Mester expressed concerns about persistent high inflation and the need for policy to address it. Fed officials are in the process of assessing the appropriateness of the current level of the fed funds benchmark rate and the duration of policy measures needed to counter inflation.

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In addition to the jobs report, a closely monitored index gauging U.S. manufacturing activity demonstrated a positive trend by rising to 47.6% in August, surpassing expectations. A reading below 50% indicates a contraction in activity.

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Lastly, developments in China, including an improved Caixin manufacturing PMI at 51 and adjustments to home down-payment requirements, also influenced market sentiment. Notably, the Hong Kong market remained closed due to Typhoon Saola's expected landfall on Friday.

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