Jobs report flops, stocks rally, yields rise anyway

Stocks closed higher across the board on Friday. The S&P 500 rose 0.74% to 7,722.85, the Dow Jones Industrial Average added 0.49% to 51,182.11, and the Nasdaq Composite led with a 1.19% gain to 27,190.86. The Nasdaq 100, the index of the 100 largest non financial Nasdaq companies, set a record close at 30,807.93. The trigger was the September jobs report, which showed just 29,000 jobs added against the 84,000 economists had expected, with the unemployment rate rising to 4.2% from 4.1%.

Start with where the Federal Reserve has been standing. For months the worry has been inflation, not unemployment, and traders were pricing roughly a 70% chance that the Fed would raise its benchmark interest rate at its October meeting. A rate hike makes borrowing more expensive everywhere, and it is generally bad for stocks.

This morning's report knocked that over. Beyond the weak headline number, the government revised its earlier counts down, cutting August to 133,000 jobs from 162,000 and turning July from a gain of 21,000 into a loss of 10,000. Average hourly earnings rose only 0.1% in the month. A labor market that soft gives the Fed very little reason to tighten further, and by the close the odds of an October hike had fallen to about 14%. Cheaper expected borrowing costs matter most to fast growing technology companies, whose value rests on profits years in the future, which is why the Nasdaq outran the Dow.

The strange part is what the bond market did. Treasury yields, meaning the annual return an investor earns for lending money to the US government, dropped immediately after the report, with the 10 year yield falling to about 5.18%. Then the buying dried up and yields climbed all day, finishing higher than where they started. The 10 year ended at 5.2939%, up about 6 basis points, a basis point being one hundredth of a percentage point. The 30 year ended at 5.6448% and the 2 year at 4.8414%.

The reason that can happen is that the Fed and the bond market set different things. The Fed sets the overnight rate banks charge each other, which is why rate hike odds move the 2 year. Yields on 10 and 30 year bonds are set by investors deciding what return they need to be compensated for inflation over decades, and one weak month of hiring does nothing to settle that question. Earlier this week the 10 year yield touched 5.34%, its highest since 2002. Bad jobs news was enough to take a rate hike off the table, and not nearly enough to convince anyone that inflation is beaten.

Individual names moved for their own reasons. Nvidia set a fresh intraday record with a market value above 5.7 trillion dollars, and Tesla rose 5.2% after beating expectations on third quarter deliveries. On the other side, Nike fell sharply on weak quarterly results and a gloomy outlook, and the hard drive makers were hit hard, with Western Digital and Seagate both down around 10% after Toshiba said it would double its disk drive production. Crude oil fell 1.57% to $91.41 a barrel after the G7 nations agreed to release 100 million barrels from their reserves, and gold slipped 0.83% to $4,142.55 an ounce.