U.S. Stocks Slip After Jobs Report

By Dow Jones Business News, 

By Dan Strumpf, Matt Jarzemsky and Min Zeng

U.S. stocks held on to their early losses while Treasury bonds rallied Friday after data showed U.S. job growth slowed sharply in August.

The report snapped a string of upbeat labor-market news that had bolstered the case that an improving U.S. economy will contribute to higher corporate profits and stock prices. But it also suggested the Federal Reserve will be in no hurry to raise interest rates, maintaining an accommodative policy widely viewed to have buoyed both stock and bond prices.

The Dow Jones Industrial Average dipped 37 points, or 0.2%, to 17032. The S&P 500 fell four points, or 0.2%, to 1993 and the Nasdaq Composite Index eased 13 points, or 0.3%, to 4549.

The U.S. economy added 142,000 jobs in August, the Labor Department said Friday, missing expectations for a gain of 225,000 jobs. The unemployment rate ticked down to 6.1% in August from 6.2% in July, in line with expectations.

In the wake of the weaker-than-expected jobs data, investors scaled back expectations for the Fed tightening monetary policy next year. The odds of a rate increase at the Fed's June 2015 meeting were 45% Friday, compared with 51% a day earlier, according to data from CME. The calculations are based on prices of 30-day fed-funds futures, the main derivative instrument for traders and investors to bet on the Fed's official-interest-rate outlook.

"The bottom line is that it's disappointing, but it's good for stocks because rates stay lower," said James Swanson, chief investment strategist at MFS Investment Management, which manages $429.7 billion. "You're still in the sweet spot where the economy is expanding."

Mr. Swanson said stocks should continue to rise if the Fed raises rates early next year as expected. He added that the jobs report suggests companies should continue holding on to their wide margins, which is supportive for stocks.

Buying in bonds pushed the 10-year U.S. Treasury note's yield, which falls as prices rise, down to 2.424%. The yield was 2.487% before the report.

"The report caught people off guard and pushed down bond yields," said Stanley Sun, interest-rates strategist at Nomura Securities International in New York. "Many anticipated this high-profile report to show decent job growth. The Fed is going to be patient."

Strong economic indicators in past weeks had some fund managers bracing for the Federal Reserve to raise short-term interest rates earlier than expected. The relatively weak jobs growth in August put some of those fears on the back burner. However, it also raised questions about the momentum of the recovery, which has helped push the U.S. stock market to record highs.

"This is a favorable report for the bond market," said Gary Pollack, who helps oversee $12 billion as head of fixed-income trading in New York at Deutsche Bank AG's private wealth management unit. "The labor market still has plenty of slack and the Fed is not going to raise rates any time soon."

Still Mr. Pollack said this report is inconsistent with other recent U.S. reports that have showed growth gaining momentum. The report could be revised higher next month but for now, it encouraged investors to buy bonds, he added.

Gold prices rose, with December gold futures up 0.3% to $1,270.20 an ounce. Gold, which yields nothing and costs money to hold, is seen as a less attractive investment during times of rising interest rates. The metal has also been pressured by a stronger dollar because some investors buy gold as a hedge against dollar weakness.

In the currency markets, the euro initially rose as high as $1.2990 after the jobs report, but quickly pared gains, recently trading at $1.2959. Against the yen, the dollar fell to Yen104.88.

"This was more of a knee-jerk reaction," said Joe Manimbo, senior market analyst at Western Union Business Solutions. "On balance, this does subtract a little from dollar bullishness, but it certainly doesn't dampen prospects for faster U.S. growth over the second half of the year."

Although Friday's jobs report was worse than expected, investors say the dollar should quickly resume its upward climb because other indicators in the U.S. economy are still showing improvement. Data released earlier this week showed the country's manufacturing sector expanding at its fastest pace in more than three years.

"We are in a low-yield world and there are investors continuing to chase returns," said Donald Ellenberger, who helps oversee $10 billion as head of multi-sector strategies at Federated Investors Inc. "The jobs report suggests the Fed is not going to alter the path on interest rates any time soon. The ECB's stimulus provides clear support for risky assets especially European stocks and credit markets."

"We are bullish on U.S. stocks" and overweight higher-yielding corporate bonds, while being underweight Treasury bonds, he said.

Nicole Hong, Ira Iosebashvili and Saumya Vaishampayan contributed to this article.

Write to Dan Strumpf at daniel.strumpf@wsj.com, Matt Jarzemsky at matthew.jarzemsky@wsj.com and Min Zeng at min.zeng@ wsj.com

  (END) Dow Jones Newswires
  Copyright (c) 2014 Dow Jones & Company, Inc.

This article appears in: US Markets , Economy , International , Commodities

Referenced Stocks: FII

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