New signs of slowing inflation

Friday’s jobs report helped calm some of those worries, which led to some up-and-down trading. Overall hiring was hotter than expected, which could be a sign the labor market remains too strong for the Fed’s liking despite the fastest set of rate hikes in decades.

But the data also showed a slowdown from January’s jaw-dropping hiring rate.

More importantly for markets, average hourly earnings for workers rose by 0.2% in February from January. That was a slowdown from January’s 0.3% gain, and it was lower than the 0.4% acceleration that economists expected. This number is crucial on Wall Street because the Fed is focusing on wage growth in particular in its fight against inflation. It worries too-high gains could cause a vicious cycle that worsens inflation, even though raises help workers struggling to keep up with rising prices at the register.

Among other signs of a cooling but still-resilient labor market, the unemployment rate ticked up and the percentage of Americans with or looking for jobs edged up by a tiny bit.

Such trends mean traders are swinging back their bets for the size of the Fed’s next rate increase.

After largely thinking the central bank would go back to a hike of 0.50 percentage points later this month, traders are now betting on a coin flip’s chance that it will stick with a more modest 0.25 point hike, according to CME Group.

Last month, the Fed slowed to that pace after earlier hiking by 0.50 and 0.75 points.

The expectations, along with worries about banks, helped send Treasury yields sharply lower.

The yield on the 10-year Treasury plunged to 3.73% from 3.91% late Thursday, a sharp move for the bond market. It helps set rates for mortgages and other important loans.

The two-year Treasury yield, which moves more on expectations for the Fed, fell to 4.69% from 4.87%. It was above 5% earlier this week and at its highest level since 2007.

Some of the sharpest drops on Wall Street came from banking stocks on worries about who else may suffer a cash crunch if interest rates stay higher for longer and customers pull out deposits. That would set up pain because a flight of deposits could force them to sell bonds to raise cash, right as higher interest rates knock down prices for those bonds.

Besides SVB Financial’s struggles, Silvergate Capital also said this week it’s voluntarily shutting down its bank. It served the crypto industry and had warned it could end up “less than well-capitalized.”

Stock losses were heaviest at regional banks. First Republic Bank tumbled 25.8%. It filed a statement with regulators to reiterate its “strong capital and liquidity positions.”

Charles Schwab lost another 6.1% after dropping 12.8% Thursday “as investors stretched for read-throughs” from the SVB crisis, according to analysts at UBS. The analysts called them “logical but superficial” because of differences in how companies get their deposits.

Losses were more modest at the biggest banks, which have been stress-tested by regulators following the 2008 financial crisis.

 

 

Copyright 2023 The Associated Press.