S&P 500 set to end week close to lows near 4,100 following robust US labour market report

• Major US indices have bounced from earlier intra-day lows hit after strong US jobs data, but are still lower.
• The latest NFP report was deemed as easing US growth weakness concerns and strengthening Fed tightening conviction.
• The main focus for equity markets next week will be US CPI.

After testing multi-month lows printed earlier in the week following strong US jobs data, major US equity indices have seen a decent intra-day rebound in recent trade. The S&P 500 went as low as the 4,060s (down 1.8% at the time), but has since rebounded to the 4,120s, where it now trades down closer to 0.5%. Despite further upside in the US 10-year yield, which recently surpassed 3.10% for the first time since 2018, the big tech/growth stock dense, rate-sensitive Nasdaq 100 index was last trading near 12,800 and down about 0.4%, having pared earlier losses to near 12,500. The Dow was last down about 0.5% in the 32,800 area, having seen similar price action.

The latest US jobs report showed that the US labour market remained in good health in April. The economy added over 400K jobs, a little more than the 391K expected and the unemployment rate remained unchanged at 3.6%, practically in line with pre-pandemic levels. Granted, it was expected to fall to 3.5%, and other labour slack metrics like the underemployment rate and participation rate deteriorated ever so slightly, but the data was received as robust.

Analysts said that the report would ease any fears about the US economy being in a recession after data last week showed that US real GDP unexpectedly shrunk in Q1, mostly due to a record trade deficit. Labour market strength is typically associated with an economy that is still growing. This, analysts reasoned, may partly explain the negative reaction to the data seen in US equity markets.

While the Fed, which hiked interest rates by 50 bps earlier in the week and signaled significant further tightening ahead, is mostly focused on tackling inflation right now, signs of economic weakness (such as last week’s GDP report) might discourage them from tightening as quickly/far. In that sense, Friday’s US jobs report has been interpreted increasing the confidence that Fed policymakers will feel that the US economy can handle significant, rapid monetary policy tightening.

It is perhaps then not surprising to see US equities experiencing further losses and ending the week close to lows. However, with US Consumer Price Inflation data upcoming next Tuesday, it appears as though traders lacked the conviction, or at least there remains enough dip-buying demand, to keep the major US equity bourses above recent lows. Nonetheless, the S&P 500 still looks on course to post a fifth successive week in the red.