Market Snapshot: S&P 500 futures recover early losses after Treasury yields spike

U.S. stock indexes rose in the final hour of trading Wednesday as bond yields eased after weaker-than-expected labor market data in the wake of a sharp sell-off Tuesday which wiped away the Dow Jones Industrial Average’s gains for 2023 gains.

How are stock indexes trading

  • The Dow Jones Industrial Average
    DJIA
    rose 111 points, or 0.3% to 33,114

  • The S&P 500 index
    SPX
    gained 28.8 points, or 0.7%, to 4,258

  • The Nasdaq Composite
    COMP
    gained 169 points, or 0.3%, to 13,227

On Tuesday, the Dow industrials fell 431 points, or 1.29%, to 33,002, posting its biggest daily percentage drop since the March banking crisis and its lowest closing level since May 31, according to Dow Jones Market Data. The S&P 500 declined by 1.4%, to 4,229, while the Nasdaq dropped 1.9%.

What’s driving markets

Stocks traded higher Wednesday as Treasury yields retreated, after payroll processor ADP said U.S. private-sector employment rose by a tepid 89,000 in September. That was the smallest increase in two and a half years. Economists polled by the Wall Street Journal had forecast a gain of 150,000.

See: ADP says only 89,000 private jobs were created in September. That’s way below forecast.

Jeffrey J. Roach, chief economist at LPL Financial, said investors should treat the ADP report with caution as it does not include government workers and is not a “consistent indicator” of the official employment report that is set to publish on Friday morning.

“That said, momentum within the labor market is slowing across the board in both goods-producing and services-producing businesses,” Roach said in emailed commentary on Wednesday.

“The labor market is cooling and is taking pressure off the Fed concerned with the risk of a second wave of inflation. Businesses should get some respite as inflation decelerates and the labor market comes into balance,” he wrote.

However, the economic data the markets have received this week, including the job openings and Wednesday’s ADP report, show the pace of the labor-market softening is still “very slow” and is not leading any indication that interest rates will come down anytime soon, said Tim Urbanowicz, head of research and investment strategy at Innovator ETFs.

“Everybody keeps trying to look for hope in the labor market, but it becomes very, very slow in that pace in order to really be confident and get to a point where we could see the Fed cuts interest rates — we have to see more deterioration in the labor market,” Urbanowicz told MarketWatch via phone on Wednesday.

“Whether you see another [interest-rate] hike or not, you’re not seeing rates come down anytime soon,” he added.

Meanwhile, an Institute for Supply Management (ISM) barometer of business conditions at service-oriented companies such as retailers and health-care providers fell slightly in September to 53.6 from 54.5 in the previous month. A reading above 50 indicates growth in the services industry. The reading matched the forecast of economists polled by The Wall Street Journal.

“Overall the survey evidence remains consistent with moderate economic growth, suggesting that the apparent strength in the third quarter was an anomaly,” according to analysts at Capital Economics.

Weakness in U.S. stocks on Wednesday was led by the energy sector after crude oil prices fell to their lowest intraday level in four weeks. The S&P 500 Energy Sector
XX:SP500.10
was down 3.9% and was on pace for its largest percentage decline since May 2, according to Dow Jones Market Data.

See: Rising Treasury yields are upsetting financial markets. Here’s why.

U.S. bond yields eased lower on Wednesday after hitting fresh 16-year highs in the previous session. The yield on the 2-year Treasury 
BX:TMUBMUSD02Y
slipped by 9.6 basis points to 5.088%, while the yield on the 10-year Treasury
BX:TMUBMUSD10Y
 also dropped 4.9 basis points to 4.755%.

The choppiness came after the S&P 500 shed 1.4% on Tuesday to close at its lowest level since the start of June as investors balked at the sight of benchmark borrowing costs hitting fresh 16-year highs in a reflection of concerns that a sturdy U.S. economy will cause the Federal Reserve to keep interest rates higher for longer.

The trend was being felt globally, with benchmark German bund yields
BX:TMBMKDE-10Y
and U.K. gilts
BX:TMBMKGB-10Y
hitting multi-year highs, too, while the DAX equity index
DX:DAX
in Frankfurt trades at its lowest since March.

“We’re at risk of repeating ourselves on a daily basis now, but the last 24 hours saw the relentless bond sell-off continue, with yields rising to fresh multi-year highs on both sides of the Atlantic,” said Jim Reid, strategist at Deutsche Bank.

“I struggle to see how the recent yield moves don’t increase the risk of an accident somewhere in the financial system given the relatively abrupt end over recent quarters of a near decade and a half where the authorities did everything they could to control yields,” Reid added.

Companies in focus

— Jamie Chisholm contributed.

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