Strong Jobs Report Tempers Stock Rally as Inflation Concerns Rise

The stock market opened Friday in a state of productive confusion. The Labor Department had just released July's employment figures, and they were strong—943,000 new jobs created, well above the 870,000 economists had penciled in. On the surface, this looked like unambiguous good news. The unemployment rate had fallen. Workers were finding positions, particularly in service industries where demand remained acute. Yet the market's response was muted, almost hesitant, because strength in the jobs market now carried a different meaning than it had months earlier.

The problem was inflation. A robust labor market, especially one showing signs of wage pressure, suggested that price increases might not be the temporary blip the Federal Reserve had been calling them. If workers were scarce and employers were bidding up wages to fill positions, those costs would ripple through the economy. Bond traders understood this immediately. Peter Cardillo, chief market economist at Spartan Capital Securities, put it plainly: the good jobs news would hurt bonds. Yields would rise. The dollar would strengthen. And all of that would weigh on stocks, which had been riding high on the assumption that the Fed would keep money cheap and abundant for months to come.

The tension was real. Just the day before, the S&P 500 and Nasdaq had closed at record highs, buoyed by a stellar earnings season. Of the 427 companies in the S&P 500 that had reported second-quarter results so far, 87.6 percent had beaten analyst expectations—the highest rate on record. Profit growth for the quarter was tracking at 92.9 percent. By any historical measure, corporate America was thriving. Unemployment claims had continued to fall. The economic recovery looked durable.

But now the market faced a dilemma it had not fully reckoned with: what happens when the economy gets too strong? The Fed had signaled it would eventually taper its bond purchases and raise interest rates, but the timing had seemed distant, theoretical. A jobs report like this one made it concrete. The Jackson Hole Economic Symposium, where Federal Reserve leaders gather to discuss policy, was looming. The question of when to begin withdrawing stimulus was no longer academic.

The opening bell reflected this ambivalence. Dow futures were up 0.29 percent. The S&P 500 e-minis were essentially flat, up just 0.04 percent. Nasdaq futures were down 0.43 percent. Individual stocks told their own stories. American International Group rose 2.3 percent after beating profit estimates. Corteva climbed 5 percent on a raised sales forecast. But Zynga plummeted 15.1 percent after issuing a weak bookings forecast and announcing a half-billion-dollar acquisition. Didi Global, the Chinese ride-hailing company, added 5.8 percent on reports it might surrender control of its data to satisfy regulators.

What emerged was a market caught between two narratives. The earnings data and employment figures told a story of economic strength and corporate resilience. The inflation signals and bond market reaction told a story of an economy that might be overheating, forcing the Fed's hand sooner than investors had hoped. For the week, the major indexes were still on track for gains, but the momentum had shifted. The easy money was priced in. What came next would depend on what the Fed decided in Jackson Hole—and whether the Delta variant, which had cast a shadow over the recovery, would slow things down enough to give policymakers room to move cautiously.