U.S. stocks book 4th straight day of gains after data showed cooling labor market, investors await inflation report

By Isabel Wang and Frances Yue

U.S. stocks finished higher on Wednesday, notching a four-session winning streak in the wake of private-sector employment data that showed job creation slowed in August, supporting the notion that the Federal Reserve may not raise interest rates further at its September policy meeting.

How stocks traded

On Tuesday, the Dow Jones Industrial Average rose 293 points, or 0.85%, to 34,853, the S&P 500 increased 64 points, or 1.45%, to 4,498, and the Nasdaq Composite gained 239 points, or 1.74%, to 13,944.

What drove markets

In a thinly traded session on Wednesday, U.S. stocks extended the winning streak to four days as investors focused on private-sector payroll data, hoping evidence of a cooling labor market could support an eventual pivot to monetary easing by the Federal Reserve.

Private sector payrolls rose by 177,000 in August, down from a revised 371,000 in the prior month, according to the payroll services firm ADP on Wednesday. Economists polled by The Wall Street Journal had forecast a gain of 200,000 private sector jobs in August.

"While the ADP report does not necessarily enjoy an exceptionally strong positive correlation with the government's payroll report due on Friday morning, it nonetheless suggests that the overheated jobs market may be cooling -- clearly what the Fed wants to see, as it should bring the labor market into balance," according to Quincy Krosby, chief global strategist for LPL Financial.

Meanwhile, the U.S. economy grew at a somewhat slower 2.1% annual pace in the second quarter, revised figures show, with a slight downward revision from the preliminary 2.4% estimate.

The S&P 500 index closed Wednesday at a three-week peak after Treasury yields slid in response to signs of a cooling labor market. The policy-sensitive 2-year yield BX:TMUBMUSD02Y was down less than 1 basis point to 4.884%, while the 10-year Treasury yield BX:TMUBMUSD10Y also fell less than 1 basis point, to 4.117%. Both rates settled at their lowest levels since August 10, according to Dow Jones Market Data.

However, the end-of-the-month bounce for U.S. stocks will face a test on Thursday, the last trading day of August, when the Fed's preferred inflation gauge, the Personal Consumption Expenditures (PCE) Index, is due out at 8:30 a.m. Eastern.

Annual U.S. inflation in July is forecast to creep back up to a rate of 3.3% from 3% in the prior month, while consumer prices are expected to rise another mild 0.2% for the month. The so-called core PCE is also expected to tick up slightly to 4.2% from 4.1% in June, according to Wall Street analysts polled by Dow Jones. The core rate omits volatile food and energy costs and is viewed by the Fed as a better predictor of future inflation trends.

See:A stormy September for U.S. stocks may lie ahead. What investors need to know about Wall Street's worst month

Markets are in a mood where any data that may support a Fed policy pivot leads to an upside push in equities, said José Torres, senior economist at Interactive Brokers.

Still, Torres expects stocks to go lower from here. "August was sluggish, but the S&P 500 is at 4,500, only 2% away from the yearly high."

"The Fed's balance sheet is going lower. You are probably going to have one more rate hike from the Fed. Earnings have been all right, but not excellent. And right now we're trading at around 19 times next year's earnings -- it is very high considering how high rates are," Torres said in a call. He expects the S&P 500 to finish the year at around 4,300.

See:Why Goldman Sachs sees uptick in interest in hedge funds in new market regime

In other economic data, the U.S. trade deficit in goods widened 2.6% to $91.2 billion in July, according to the Commerce Department's advanced estimate released Wednesday. Economists polled by Econoday were looking for the deficit to rise to $90.8 billion deficit.

Companies in focus

Jamie Chisholm contributed

-Isabel Wang

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08-30-23 1623ET

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