Stocks Plummet on Rate Hike Worries

Exchange-traded funds tracking key benchmarks followed equities lower in the aftermath of a stronger-than-expected September jobs report—a phenomenon that analysts predict will force the Federal Reserve to continue its hawkish course.  

U.S. nonfarm payrolls increased by 263,000 in September after 315,000 additions posted in August, exceeding Bloomberg-polled economists’ expectations of 255,000. Meanwhile, the unemployment rate dropped 0.2% to 3.5%, matching a five-decade low.  

The jobs report suggests the Fed’s series of interest rate hikes isn’t cooling the economy sufficiently, and rates will increase, analysts say. High inflation has persisted as the Fed has raised interest rates five times so far this year, including three at .75%. 

“What we are seeing is the opposite of what the Federal Reserve wants to see. This labor market is not cooling down,” Philippe Miller, a global capital markets analyst at Validus Risk Management, said in an emailed statement to ETF.com. “This is the opposite of what the equity markets had priced, and confirms there is no Fed pivot that should occur in 2022.” 

The S&P 500 tumbled 2.8% Friday, extending its decline for this year to 24%. The Nasdaq dropped 3.8% and is down 32% for this year. Equity-focused exchange-traded funds similarly slid, with the SPDR S&P 500 ETF Trust (SPY) and the Invesco QQQ Trust (QQQ) slipping in accordance with their corresponding indices.  

The report may indicate another 0.75% when the Fed meets in November. That would raise the federal funds rate to between 3.75% and 4%, levels not seen since 2008. Policy-sensitive Treasury bills have already seen yields spike, with the benchmark 10-year note reaching nearly 3.9% on Friday afternoon. On the other side of the ledger, the iShares 7-10 Year Treasury Bond ETF (IEF) dropped 0.4%. Bond yields move inversely to prices.  

"The Federal Reserve looks at this and other job market data, along with still hot inflation pressures, and will continue to believe it needs to boost interest rates,” Mark Hamrick, senior economic analyst at Bankrate, said in a note. “That appears to be a certainty for the upcoming meeting in early November.”  

Investors’ fears for a fourth consecutive 75 basis point hike were stoked earlier in the week, when Minneapolis Fed President Neel Kashkari declared in a talk hosted by Bremer Financial Corp. that the central bank has “more work to do.”  

“Until I see some evidence that underlying inflation has solidly peaked and is hopefully headed back down, I’m not ready to declare a pause,” Kashkari said on Thursday. “I think we’re quite a ways away from a pause.” 

Contact Shubham Saharan at [email protected]