The US Slowdown Has Begun, Risk Assets Are Vulnerable As Recession Clouds Gather

Brian Evans and Pia Singh of CNBC report the Dow closes more than 100 points higher to kick off September, notches best week since July:

The Dow Jones Industrial Average rose on Friday as traders weighed the latest U.S. jobs report to conclude a winning week.

The 30-stock Dow ticked up 115.80 points, or 0.33%, to close at 34,837.71 The S&P 500 added roughly 0.18% to finish the session at 4,515.77, and the Nasdaq Composite inched down 0.02% to end the day at 14,031.81.

The major averages were up sharply earlier in the day. The Dow briefly traded more than 250 points higher, while the S&P 500 and Nasdaq climbed about 0.8% each before easing.

The Dow and the Nasdaq added 1.4% and about 3.3% for the week, respectively, notching their best performances since July. The S&P 500 gained 2.5% to register its best week since June.

Unemployment rate jumps

The latest U.S. nonfarm payrolls report showed the unemployment rate ticked higher to 3.8% in August, reaching its highest level in more than a year. Economists had expected it to remain at 3.5%.

In another sign of a slowing economy and easing pricing pressures, average hourly earnings increased 4.3% on a year-over-year basis, less than the 4.4% increase expected by economists polled by Dow Jones.

August payrolls grew at a faster-than-expected pace, with 187,000 being added. However, job numbers first reported for June and July were revised down by a combined 110,000.

“It would be a mistake to look at today’s employment report, along with recent data, and say the Fed is done,” said Steve Wyett, chief investment strategist at BOK Financial. “Even though trends in inflation are moving the right direction and a broader view of the employment market would indicate wage pressures should abate, overall economic growth is above trend and inflation remains well above the Fed’s recently confirmed 2% target.”

Following the release, the CME Group’s FedWatch tool showed traders have priced in a 93% chance of the central bank holding rates at current levels at its policy meeting later this month.

Investors also pored over fresh earnings reports. Database software maker MongoDB and Dell Technologies advanced 3% and 21%, respectively, on the back of stronger-than-expected earnings reports. Shares of athletic apparel retailer Lululemon Athletica added 6% after crushing Wall Street’s estimates.

Filip De Mott of Business Insider also reports US stocks rise as jobs data dampens fears of a tighter Fed:

US stocks climbed Friday as the latest jobs report data diminished concerns of more interest rate hikes from the Federal Reserve.

Nonfarm payrolls climbed 187,000 in August, topping expectations. But wage growth was subdued, the unemployment rate rose to 3.8% from 3.5%, and job gains from prior months were revised lower. They added to earlier indications of a cooler labor market.

"The Fed couldn't hope for a better report in their fight against inflation," Chief Investment Officer for Independent Advisor Alliance Chris Zaccarelli said in a statement, adding: "If the economy can continue to expand and the labor market can cool at a slow pace, rather than at a rapid clip, then the Fed can afford to leave rates where they are and patiently wait for (current) higher rates to do their work."

After the jobs report, the odds on Wall Street for a Fed rate hike this month and later this year dropped.

Here's where US indexes stood shortly after the 9:30 a.m. opening bell on Friday: 

  • S&P 500: 4,536.63, up 0.64%

  • Dow Jones Industrial Average: 34,947.82, up 0.65% (225.91 points)

  • Nasdaq Composite: 14,127.44, up 0.66%

Here's what else is going on: 

In commodities, bonds, and crypto: 

Alright, it's Friday, a long weekend awaits us so let me get to it.

Let's begin with analysis and reaction to the US jobs report:

My take? Clearly the US economy is just starting to moderate and we are in the early innings of a long and nasty recession. This will not end well:

As far as the Fed, it may raise rates once more in September but I doubt it as it knows the lagged effects of all its rate hikes are just kicking in. 

So, with the US economy slowing, where does that leave stocks?

Well, as usual, all over the place depending on who you talk to:

I think the more interesting aspect is what is happening in the bond market:

On this topic of bonds, Martin Roberge of Canaccord Genuity wrote an interesting weekly comment asking whether the bond market remains hostage to Japan and China:

Our focus this week is on the US bond market where gyrations over the past two years go beyond US growth and inflation pulses. Indeed, since January 2022, our Chart of the Week shows that there has been a strong correlation with the USD/JPY and USD/CNY exchange rates vis-à-vis US 10-year Treasury yields. As such, we believe the marked depreciation of the Japanese Yen and Chinese Yuan may have forced the BoJ and the PBoC to accelerate sales of their US bond holdings in order to protect their currencies. In fact, TIC data (not shown) that measure major foreign holdings of Treasury Securities corroborate our hunch with Japan and China, the biggest holders of US Treasuries, having sold for about $400B combined worth of US Treasury bonds since 2022. While the PBoC sells US$ and buys Yuan to offset capital outflows, the BoJ sells US$ and buy Yen to curb import price inflation and manage the expansion of its yield curve control (YCC). That said, with the USD/JPY 150 and USD/CNY 7.30 resistances coming into play, we believe these two central banks are determined to protect these levels which should then allow bond yields to recouple with slowing global growth/inflation momentum. However, should we be wrong and these resistances are broken, this would likely set in motion an important steepening of the bond yields curve, with the short end anchored down due to slowing economic growth.

Interestingly, hedge funds continue to short Treasuries and are increasing their short positions:

Ironically, hedge funds are also loaded up to the hilt on tech stocks:

And this at a time when global buybacks are near record levels and US profits are decelerating fast:

All I know is these markets are tough to call and even the best strategists are being beaten by these three indicators this year:

Alright, let me wrap it up there and wish everyone a nice long weekend.

Below, CNBC's Rick Santelli joins 'Squawk Box' to break down the August jobs report.

Second, Roger Ferguson, former Federal Reserve vice chairman, joins 'Squawk Box' to discuss the August jobs report, the impact on the Fed's rate hike campaign, and more.

Third, Frances Donald, Manulife Investment Management global chief economist, and CNBC's Steve Liesman join 'The Exchange' to discuss what the August jobs report signals about the economy, whether we are heading into a recession, and more.

Fourth, Rick Rieder, CIO of global fixed income at BlackRock, says it’s time to get behind more interest rate exposure than over the last few months as “the Fed should be done.” He speaks with Alix Steel on "Bloomberg The Open."

Fifth, Ed Yardeni, Yardeni Research president, joins 'Squawk Box' to discuss the latest market trends, the August jobs report, the Fed's rate hike campaign, and more.

Lastly, David Rosenberg, Rosenberg Research, joins 'Fast Money' to talk the U.S. economy, the impact of interest rates, slowing employment growth and more.