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Stocks Closed Lower Amid September’s Key Labor Report

Stocks traded noticeably lower on the heels of the September nonfarm payroll report but were still able to post weekly gains following the strong rebound on Monday and Tuesday. The labor data showed job growth rose more than predicted, while the unemployment rate unexpectedly declined, and the labor force participation rate surprisingly dipped. The report seemed to dampen recently increased optimism that the Fed could decelerate its aggressive monetary policy tightening campaign. In other economic news, wholesale inventories were unrevised at a solid gain, and data on consumer credit showed consumer borrowing was well above expectations. Treasury yields rose following the labor report, and the U.S. dollar continued to rebound from a stumble earlier in the week. Crude oil prices climbed following the decision from OPEC+ to cut oil production on Wednesday, and gold traded lower. In equity news, Levi Strauss topped earnings estimates but missed revenue forecasts and cut its full-year guidance, while Advanced Micro Devices lowered its revenue outlook. Asian stocks finished out the week broadly lower, and European stocks trimmed a weekly gain as volatility remained in the currency and bond markets across the globe.

The Dow Jones Industrial Average decreased 630 points (2.1%) to 29,297, the S&P 500 Index fell 105 points (2.8%) to 3,640, and the Nasdaq Composite tumbled 421 points (3.8%) to 10,652. In moderate volume, 4.4 billion shares of NYSE-listed stocks were traded, and 4.6 billion shares changed hands on the Nasdaq. WTI crude oil climbed $4.19 to $92.64 per barrel. Elsewhere, the gold spot price declined $17.80 to $1,703.00 per ounce, and the Dollar Index rallied 0.6% to 112.81. Markets ended higher for the week, as the DJIA rose 2.0%, the S&P 500 gained 1.5%, and the Nasdaq Composite increased 0.7%.

Levi Strauss & Co. (LEVI $14) reported adjusted Q3 earnings-per-share (EPS) of $0.40, above the $0.37 FactSet estimate, as revenues rose 1.0% year-over-year (y/y) to $1.5 billion, below the Street's forecast of $1.6 billion. The clothing company said inventories increased 43.0% compared to the end of the corresponding prior year period due to cost of goods sold (COGS) inflation and the normalization of last year's unusually low inventory level. LEVI also said earlier international receipts of core inventory to mitigate supply chain risks also contributed to the increase in inventory, and it remains comfortable with the quality and composition of inventories. The company lowered its full-year guidance, citing foreign exchange headwinds, as well as a more cautious outlook for North America and Europe due to macroeconomic conditions and ongoing supply chain disruptions. Shares of LEVI fell.

Advanced Micro Devices Inc. (AMD $58) warned that its revenues will come in lower than previously forecasted, reflecting lower-than-expected client segment revenue resulting from reduced processor shipments due to a weaker-than-expected PC market and significant inventory correction actions across the PC supply chain. Shares were noticeably lower, and the warning put a damper on the Information Technology sector.

Despite the past three days of declines, the S&P 500 Index remained higher for the week after rallying on Monday and Tuesday, bouncing back from a string of weekly declines that took the index to levels not seen since 2020. The Energy sector decisively outperformed this week as crude oil prices rallied sharply, bolstered by the oil production cuts from OPEC and its allies, known as OPEC+. The heavyweight Information Technology sector also gained ground, along with cyclically natured Industrials and Materials sectors. Financial conditions continued to tighten, with Treasury yields moving higher and the yield curve steepening, while the U.S. dollar rebounded from an early week drop. As such, Real Estate issues fell, and Utilities saw pressure. The markets continued to grapple with whether the current environment will allow the Fed to ease off the monetary policy tightening accelerator, but data regarding the employment front and Fedspeak seemed to dampen the optimism.

Moreover, persisting inflation pressures that have forced the Fed to aggressively tighten monetary policy preserved concerns about the economy, as discussed in the article, Stock Market Volatility: Recession Worries Flare. Meanwhile, the markets geared up for the start of Q3 earnings season next week, and Schwab's Chief Investment Strategist Liz Ann Sonders discusses in her latest article, Earnings: Trampled Under Foot? how the bear market has been driven by multiple compression, making valuations look relatively compelling, but expected weakness in earnings may limit the upside potential for stocks. You can follow Liz Ann on Twitter: @LizAnnSonders.

Read all our market commentary on our Insights & Education page, and you can follow us on Twitter at @SchwabResearch.September job growth tops forecasts, while unemployment rate unexpectedly declinesNonfarm payrolls (chart) rose by 263,000 jobs month-over-month (m/m) in September, compared to the Bloomberg consensus estimate of a 255,000 rise, while August's figure was unadjusted at an increase of 315,000. Excluding government hiring and firing, private sector payrolls advanced by 288,000, versus the forecasted rise of 275,000, after increasing by 275,000, revised down from the preliminarily reported 308,000 gain in August. The labor force participation rate dipped to 62.3% from August's unrevised 62.4% figure, where it was expected to remain.

The unemployment rate declined to 3.5% from August's 3.7% rate, where forecasts called for it to remain. The underemployment rate—including total unemployed and those employed part-time for economic reasons, along with people who are marginally attached to the labor force—fell to 6.7% from the prior month's 7.0% rate. Average hourly earnings were up 0.3% m/m, in line with projections and August's unadjusted rise. Compared to last year, wages were 5.0% higher, matching forecasts, and below August's unadjusted 5.2% rise. Finally, average weekly hours remained at August's 34.5 rate, as expected.

August wholesale inventories were unrevised at a 1.3% month-over-month gain, as expected, and above July's 0.6% increase. Sales ticked 0.1% higher after July's downwardly adjusted 1.5% decrease.

Consumer credit, released in the final hour of trading, showed consumers borrowed $32.2 billion in August, well above the $25.0 billion forecast, while July's figure was adjusted upward to $26.1 billion from the originally reported $23.8 billion read. Non-revolving debt—includes student loans and loans for vehicles and mobile homes—expanded by $15.1 billion, a 5.1% increase y/y, while revolving debt—includes credit cards—gained $17.2 billion, an 18.1% y/y rise.

Treasury yields advanced following the labor report, with the yield on the 2-year note rising 8 basis points (bps) to 4.32%, the yield on the 10-year note gaining 7 bps to 3.89%, and 30-year bond rate increasing 5 bps to 3.84%.

Bond yields and the U.S. dollar have been bolstered as of late by the Fed's aggressive monetary policy actions, as discussed by Schwab's Chief Fixed Income Strategist Kathy Jones in her article; With Inflation Offsides, the Fed Keeps Hiking. The Fed has hiked rates by 75 bps for three-straight meetings, downgraded economic growth forecasts, and increased the unemployment rate outlook, as inflation remains the Central Bank's primary concern. You can follow Kathy on Twitter: @KathyJones.

Schwab’s Liz Ann Sonders discusses the impact of the greenback’s recent rise in her latest article, Ripple(s) From Surging Dollar, discussing how while a spike in global market volatility has prompted some investors to think a Fed response is imminent, we caution against thinking that intervention is a bullish development.

Looking ahead to next week, along with the start of the Q3 earnings season, the economic calendar will also offer some key data points that could shape market action. The development of the September inflation picture, courtesy of the Producer Price Index (PPI), Consumer Price Index(CPI), and the Import Price Index, is likely to carry the most weight given the current environment and as the markets try to determine how aggressive the Fed will remain. The all-important U.S. consumer will also be in focus as we will get the release of September retail sales and the preliminary October University of Michigan Consumer Sentiment Index. Other reports due out next that deserve a mention include the NFIB Small Business Optimism Index, business inventories, and initial jobless claims for the week ended October 8. Fedspeak will also continue to pour in, and the Central Bank will release the minutes from its September monetary policy meeting, which could garner scrutiny.

Europe trimmed weekly gains.

Stocks in Europe traded lower, with the markets paring a weekly gain as volatility in the currency and bond markets remained, the energy crisis in the region continued to fester, and the global monetary policy environment remained tight. Today's stronger-than-expected U.S. September labor data was digested and appeared to dampen hopes that the pace of monetary policy tightening by the Fed could ease. The prospect of a potential deceleration in monetary policy tightening seemed to help the week's advance after last week, the Bank of England announced that it will buy long-term bonds, and this week Australia raised rates by a smaller amount than expected. Crude oil prices moved higher after this week's decision from OPEC+ to cut oil production by 2 million barrels per day. In economic news, German retail sales declined more than expected for August, and Germany's import prices jumped more than expected. The British pound and the euro traded lower versus the U.S. dollar, which rebounded for a second-straight session, while bond yields in the Eurozone and the U.K. traded noticeably higher.

The worrisome inflation picture is being exacerbated by an ensuing energy crisis in the region due to the ongoing war in Ukraine. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, notes in his latest article, What's Next: Good, Bad, & Ugly, that the persistence of global inflation could determine which of the three paths central banks may follow and which market qualities investors might consider for their portfolios. You can follow Jeff on Twitter: @JeffreyKleintop.

The U.K. FTSE 100 Index dipped 0.1%, France's CAC-40 Index declined 1.2%, Germany's DAX Index fell 1.6%, Italy's FTSE MIB Index went down 1.1%, Spain's IBEX 35 Index decreased 1.0%, and Switzerland's Swiss Market Index traded 0.8% lower.

Asia lower to close out the week.

Stocks in Asia finished broadly lower as the global markets continued to monitor the volatility in the currency and bond markets, with the U.S. dollar rebounding sharply for a second-straight session and world bond yields continuing to climb. The markets continued to grapple with tighter monetary policies in most parts of the world, led by the Fed, though Japan has maintained its accommodative policy and China has actually provided further monetary policy stimulus, which has weighed on their respective currencies. In economic news, Japan's household spending rose in August but at a rate that was below estimates, and India's services sector growth slowed solidly in September.

Schwab's Jeffrey Kleintop provides commentary on China's situation in his article, China Q&A: Top 5 Questions, discussing various topics, including inflationary concerns, currency movements, government policies, and more.

Japan's Nikkei 225 Index decreased 0.7%, with the yen remaining soft versus the U.S. dollar, continuing to sit near multi-decade lows versus the greenback, given the divergence of monetary policies. Australia's S&P/ASX 200 Index declined 0.8%, and South Korea’s Kospi Index traded 0.2% lower. The Hong Kong Hang Seng Index fell 1.5%, continuing to give back the sharp jump seen on Wednesday, and India's S&P BSE Sensex 30 Index dipped 0.1%. Volume remained lighter than usual as markets in mainland China remained closed for the Golden Week holiday.

Next week's international economic calendar is set to deliver some key reports that could move the markets, headlined by a fully loaded docket out of China, which will bring the releases of lending statistics, PPI and CPI, and trade balance, along with its decision on 1-year medium-term lending facility rate. India will report industrial production, CPI, wholesale prices, and trade balance. Japan will release its core machine orders report, which will be accompanied by its machine tool orders release and PPI. In the Eurozone, investor confidence data will be reported, along with industrial production and the trade balance. Finally, the U.K. will announce reports on GDP, industrial and manufacturing production, trade balance, and employment change.


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