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July's job gains raise odds of September rate hike

The stock market sell-off deepened this week as a growing list of individual issues tipped into downtrends. One-time high-fliers such as Disney (DIS), Apple (AAPL) and Tesla (TSLA) are joining already weak stocks such as Exxon Mobil (XOM) to the downside.

On Thursday, the Dow Jones industrials dropped to test six-month lows. As a result, 121 members of the S&P 500 were pushed down more than 20 percent from their highs, qualifying for their own individual bear markets. The selling continued on Friday, ending with the Dow on a seven-day losing streak -- a first since 2011.

Aside from disappointing second-quarter earnings, traders are growing increasingly nervous about the specter of higher interest rates.

Friday's nonfarm payrolls report for July came in about as expected, with 215,000 jobs created and the unemployment rate holding steady at 5.3 percent (but more because of job gains rather than those dropping out of the labor force, which is a better result). Given all the evidence of continued tightening in the labor market, this further raises expectations the Federal Reserve will raise interest rates at its Sept. 17 policy announcement for the first time since 2006.


Concerning a September hike, Eric Green at TD Securities believes the payrolls result "has raised the odds," while Brian Jones at Societe Generale told clients it leaves the Fed "on track " for liftoff. IHS's Nariman Behravesh said the gain "strengthens the case" for action next month.

Michelle Meyer at Bank of America Merrill Lynch noted that the job gains probably satisfy the Fed's own criteria of "some" further improvement in the labor market being needed before it starts a rate hike campaign. In her opinion, "the burden is on the data to weaken to prevent the Fed from hiking rather than to accelerate in order to prompt hikes."

And while wage growth remains tepid, with average hourly earnings increasing only 0.2 percent month-over-month and 2.1 percent annually, Meyer reminded that Fed Chair Janet Yellen herself has admitted that rising wages aren't a precondition for inflation or rate hikes.


The futures market has been downplaying the chances of a September rate liftoff, but the flow of economic data and comments from Fed officials have forced a reevaluation. Traders realized, as shown in the chart above of expectations from RBS, they were opening the door to a big negative surprise if Yellen actually pulled the plug on eight years of zero-percent interest rates.

The increasing preparation for a rate hike explains the general sense of malaise in the financial markets in recent weeks, with commodities, high-yield bonds and foreign stocks taking the brunt of the damage so far.

The contagion is spreading as investors feel the sting of fear -- something they haven't felt since 2012, in the midst of an actual 10-percent-plus market correction.

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