By Dan Strumpf, Matt Jarzemsky and Min Zeng
Stocks shed their losses in midday trade while Treasury bonds
rallied 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 rose two points to 17072 in
midday trading, pulling back from a loss of as much as 60 points
earlier in the session. The S&P 500 was up a point at 1998. The
Nasdaq Composite Index was five points, or 0.1%, lower at 4557.
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. Shortly after the jobs report, 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