Stocks notched their biggest advance since February as a slowdown in U.S. jobs sent bond yields sliding, with traders reviving bets on Federal Reserve rate cuts this year.

A softer-than-estimated payrolls number — that did not signal the labor market is rolling over — and a cooldown in wages appeased investors worrying about “stagflation” or a recession. Instead, the latest employment print gave fodder to the believers in an economy that is gradually slowing and would allow a data-dependent Fed to start easing policy as early as September.

“The payroll miss hands the baton to the bulls,” said Jose Torres at Interactive Brokers. “Markets are rallying aggressively as incoming data point to a shorter journey across the monetary-policy bridge.”

The S&P 500 rose 1.3 per cent, with equities also buoyed by Apple Inc.’s post-earnings surge. The tech-heavy Nasdaq 100 climbed 2 per cent. Wall Street’s “fear gauge” — the VIX — sank to an over one-month low.

Treasury two-year yields, which are more sensitive to imminent Fed moves, dropped seven basis points to 4.81 per cent. Swap traders are now projecting around 50 basis points of policy easing this year — which would equate to two rate cuts. The dollar saw its worst week since March.

A litany of weaker-than-estimated data points this week — from jobs to services and manufacturing — put the focus back on the “bad news is good news” narrative. The U.S. version of Citigroup’s Economic Surprise Index — which measures the difference between actual releases and analyst expectations — hit the lowest since February 2023.

Nonfarm payrolls advanced 175,000 in April, the smallest gain in six months. The unemployment rate ticked up to 3.9 per cent and wage gains slowed.

“The softer-than-expected payroll report suggests there is no heat in the economy that should keep inflation persistently high, which increases odds for rate cuts this year,” said Sonu Varghese at Carson Group.

Fed Bank of Chicago President Austan Goolsbee told Bloomberg Television that additional jobs reports like Friday’s would give him comfort the economy is not overheating. Speaking separately, Governor Michelle Bowman said inflation will likely remain elevated for “some time,” but added she still anticipates price gains will eventually cool with rates held at current levels.

Following Wednesday’s Fed decision, Chair Jerome Powell noted it’s unlikely the next move would be to raise rates.

Being weaker across the board, the April employment report vindicates Powell’s decision not to lurch hawkish at the May meeting and “is good news for the Fed and the market,” according to Krishna Guha at Evercore.

“We feel somewhat more confident in our base case that the Fed will start cutting by September,” Guha added.

To Seema Shah at Principal Asset Management, the latest jobs report indeed brings the rate-cutting dialogue back into the market and perhaps explains why Powell was able to lean more dovish on Wednesday.

“This is the jobs report the Fed would have scripted,” Shah noted. “Of course, today’s weaker numbers need to mark the start of a new slower trend for multiple rate cuts to seriously be back on the agenda - but, by then, the new fear could be a slowing economy.”

Separate data Friday showed the U.S. services sector unexpectedly contracted in April for the first time since 2022 as a gauge of business activity slumped to a four-year low and a measure of input costs rose.

“Today’s jobs report is the definition of Goldilocks: job growth that is gradually moving back to around trend amid a normalization of wage growth,” said Gennadiy Goldberg at TD Securities “This is certainly the type of employment report that Fed officials will welcome. We remain optimistic that the Fed will first ease rates at its September FOMC meeting.”

Overall, market observers say signs of a cooling economy could nudge the Fed to lower interest rates over time — but that inflation data would be vital.

“Worried that the U.S. economy is overheating? The April employment report throws a bit of cold water on that idea,” said Mark Hamrick at Bankrate. “The data will need to align for the Fed to gain confidence that inflation is getting closer to its 2 per cent target before pulling a rate cut trigger. It remains on high alert for unacceptably high inflation.”

A rally in U.S. stocks faltered last month as the Fed signaled it would hold interest rates higher for longer amid elevated inflation. A sharp slowdown in economic growth in the first quarter has also raised “stagflation” chatter — though many market observers have downplayed that possibility at this stage.

To Alexandra Wilson-Elizondo at Goldman Sachs Asset Management, the latest jobs report should be perceived by markets as a “welcome breath of fresh air as it will hush the hawkish undertone in the market and any recent ‘stagflation’ fears.”

While Fed officials will likely be relieved that the labor market is cooling, this report is not soft enough to change the Fed outlook, according to Tiffany Wilding at Pacific Investment Management Co. 

“Hiring was strong, unemployment remains low, and wages are likely to tick up again next month,” she noted.

Wilding bets the Fed will try to get at least one cut in this year, but she still expects the central bank to take one or two cuts out of its rate-path projections when it releases new Summary of Economic Projections in June. Back in March, Fed officials maintained their outlook for three interest-rate cuts in 2024.

“If inflation does not breakout and jobs data stays moderate, a first rate cut could be due in September, but we expect the Fed to remain very dependent on incoming data, meeting by meeting,” said Larry Tentarelli at Blue Chip Daily Trend Report.

Chris Zaccarelli at Independent Advisor Alliance says that as long as the Fed maintains rates where they are — or cuts once or twice — the market can keep moving higher.

More Comments on Jobs:

• Michael Kantrowitz at Piper Sandler & Co.:
  • Soft macroeconomic data is needed to bring rates down and stocks up. Bullish all day.
• David Donabedian at CIBC Private Wealth U.S.:
  • The April employment report supports the optimism expressed by Jerome Powell on Wednesday regarding how the economy would unfold in coming months, settling into a slower rate of growth with inflation coming down.
  • Following the April jobs report, there is rising optimism that the Fed may be more supportive of the markets now pricing in two possible rate cuts this year.
• Glen Smith at GDS Wealth Management:
  • Friday’s weaker-than-expected jobs report is unlikely to change the Federal Reserve’s hesitancy to cut interest rates in the near-term, as there have still been several months of strong jobs and inflation data and it’s clear that inflation is still too far above the Fed’s 2 per cent target to justify a rate cut. 
• David Mazza at Roundhill Investments:
  • While one softer-than-expected jobs report will not be enough to bias the Fed to cut at their next meeting, it shows the labor market may be starting to materially cool. 
  • More importantly, wage growth was lower than expected, which is a positive sign for inflation. In short, this coupled with Apple’s earnings report, will put the bulls in charge to close out a busy macro week.
• Mohamed El-Erian at Queens’ College, Cambridge and a Bloomberg Opinion columnist:
  • A goldilocks report that will please the Fed and please the markets.
  • I’m not particularly surprised on the miss on job creation, because we have been running at very high levels for the year. I’m a little surprised on the wage, the 0.2 per cent, that is the one that surprises me. That’s something that one needs to look at much more closely.
• Charlie Ripley at Allianz Investment Management:
  • Overall, data from the April labor market report dampened the market’s view on how strong the U.S. economy is running and has allowed the possibility of rate cuts this year to come back into the conversation. At any rate, the Fed will certainly welcome the data as it should relieve some of the pressure around the higher-for-longer policy narrative.
• Jeffrey Roach at LPL Financial:
  • The demand for labor is slowing which will eventually ease inflation pressures, giving the Fed some leeway to cut rates later this year. Slower payroll growth and fewer hours worked imply the economy is slowing at a measured pace. This jobs report is consistent with the soft landing narrative.
• Bret Kenwell at eToro:
  • The April jobs report appears to be a Goldilocks print for investors. The April jobs report doesn’t create an urgent concern for the labor market or the economy, and it found a way to thread the needle between being soft enough, but not too weak.
  • The bond market is back to pricing in two rate cuts for the year, which is a relief to stock and crypto bulls.
  • Investors do not want to cheer for labor market deterioration. While some softness will help grease the wheels for looser financial policy from the Fed, persistent weakness in the jobs market would be a clear negative for the market.
• Ronald Temple at Lazard:
  • Today’s payroll report combined with the job opening and quit data all point to easing of labor market tightness, which should translate to lower wage and inflation pressure, opening the door for rate cuts as early as the September meeting.
• George Mateyo at Key Wealth:
  • Just what the Fed Chair wanted! Today’s employment report was weaker than expected. Yet, the weakness was not so weak to suggest that the labor market is rolling over. It was a slowdown that the Fed and many market participants have been wanting for some time.
  • Rate cuts will come back into focus, and investors should remain vigilant for larger slowdowns in the month ahead. But today, this small amount of bad news relative to expectations will be viewed as good news, and suggest the economy is moderating but remains on solid ground.
• Chris Low at FHN Financial:
  • Today’s report was a far cry from the kind of labor market weakness that would prompt a Fed rate cut. Nevertheless, more abundant labor and slower job and wage growth should help contain inflation, and that is the key to rate cuts. Hence, odds of a September rate cut have climbed.
• Chris Larkin at E*Trade from Morgan Stanley:
  • Following a steady stream of sticky inflation data in recent months, today’s much-weaker-than-expected jobs report had to bring smiles to the faces of the Fed board. It may not put a June rate cut back on the table, but unless it turns out to be an anomaly, it will increase the odds that the Fed will be able to get in at least one cut this year.
• Richard Flynn at Charles Schwab UK:
  • Investors will interpret today’s weak jobs report as a sign that demand is slowing in the labor market. A dive in the labor market may be what it takes to push the Fed from a stroll to a sprint.
• Andrew Brenner at NatAlliancer Securities:
  • Weaker number, increased unemployment rate, and lower wage growth. Looks like a Goldilocks report.
• Matt Peron at Janus Henderson Investors:
  • The NFP report was a big sigh of relief for markets, with a softer job market and importantly a softer average hourly earnings readout.  Taken together, this should give markets some hope that inflation is not as sticky as feared and raises the possibility of getting back on the disinflation trend we saw last year. 
  • In terms of markets, this should be a big boost given the negativity around sticky inflation of late, and if confirmed, can bring the prospect of rate cuts back into the picture for 2024.
• Neil Birrell at Premier Miton Investors:
  • What will the Fed make of this? At last there is evidence of some weakness in the U.S. jobs market. Rate cuts will move back up the agenda as a result and there is little doubt that markets will take this as good news. While we shouldn’t make too much of single data prints, this could be the start of a positive trend for the Fed.
• Florian Ielpo at Lombard Odier Asset Management:
  • This report is generally good news for the markets, especially for bondholders. It could herald a period of at least stable interest rates, accompanied by a gradual weakening of the U.S. dollar. 

Corporate Highlights:

• Apple Inc. posted stronger-than-expected sales last quarter and predicted a return to growth in the current period, sparking optimism that a slowdown is easing. Profit also topped Wall Street projections in the period, and Apple announced the biggest stock buyback in U.S. history.
• Amgen Inc.’s shares soared after its chief executive officer said he was “very encouraged” by early results from a study of the company’s experimental obesity drug, MariTide.
• Societe Generale SA equities traders outshone their bond-trading counterparts for a fourth straight quarter, with revenue from the unit helping the French bank beat estimates for profit in the three months through March.
• Booking Holdings Inc., owner of travel brands Kayak and Priceline, said it expects room-night reservations to slow in the current quarter as tensions in the Middle East curb regional tourism.

Some of the main moves in markets:

Stocks

• The S&P 500 rose 1.3 per cent as of 4 p.m. New York time
• The Nasdaq 100 rose 2 per cent
• The Dow Jones Industrial Average rose 1.2 per cent
• The MSCI World index rose 1.2 per cent

Currencies

• The Bloomberg Dollar Spot Index fell 0.3 per cent
• The euro rose 0.4 per cent to US$1.0764
• The British pound rose 0.1 per cent to $1.2549
• The Japanese yen rose 0.5 per cent to 152.89 per dollar

Cryptocurrencies

• Bitcoin rose 5.7 per cent to $62,103.17
• Ether rose 2.9 per cent to $3,074.41

Bonds

• The yield on 10-year Treasuries declined eight basis points to 4.50 per cent
• Germany’s 10-year yield declined five basis points to 2.49 per cent
• Britain’s 10-year yield declined six basis points to 4.22 per cent

Commodities

• West Texas Intermediate crude fell 1 per cent to $78.14 a barrel
• Spot gold fell 0.1 per cent to $2,301.47 an ounce