(Oct 3): Treasuries slid and the US dollar climbed after stronger-than-expected jobs numbers dampened Wall Street’s confidence that the Federal Reserve’s next interest-rate cut would be a big one. 

Ten-year yields closed in on 3.8% after hitting a low of 3.69% in the prior session amid a flare-up of tensions in the Middle East. The dollar reached nearly a two-week high after the labor readout as traders pondered the scope of the Fed’s next move. 

Data Wednesday showed US companies added more jobs than expected last month, at odds with other indicators that show a cooling labour market. Friday’s non-farm payrolls numbers will be the next critical gut check on the health of workers and the US economy. 

“Today’s ADP employment number surprised to the upside, suggesting the labor market is bending but not breaking,” said Chris Larkin at E*Trade from Morgan Stanley. “Friday’s monthly jobs report will have the final word on the current jobs picture, and more than likely, on near-term market sentiment.”

That left stocks struggling to buck the last of Tuesday’s risk-off mood as updates from the Mideast slowed. The S&P 500 ended the day little changed while the Nasdaq 100 rose 0.1% as traders also balanced the data against disruptions from a dockworkers’ strike at key US ports and the destruction of Hurricane Helene.

Swaps traders were pencilling in some 33 basis points of policy easing at the central bank’s November meeting, down from 44 basis points just last week. 

The jobs report won’t take a half a percentage point cut off the table, according to Bank of America Corp strategists led by Meghan Swiber. 

“Even if the labour market surprises to the strong side, pricing will still maintain optionality,” they wrote.

To Marc Rowan, the chief executive officer of Apollo Global Management Inc, the Fed’s aggressive policy easing threatens to overstimulate the economy. 

“It is not clear we need more rate cuts,” he said in an interview with Bloomberg Television, pointing to ready financing and rising real estate prices.  

Richmond Fed president Thomas Barkin took a different view, saying it was too early for the central bank to declare victory over rising prices. “While we have made real progress — there remains significant uncertainty on both inflation and employment,” he said. 

Traders are hoping tensions in the Middle East will once again fade into the background — much as they did in April — even after Israel vowed to retaliate against a missile barrage from Iran. President Joe Biden urged Israel to hold off from attacking Iran’s nuclear facilities. 

Early gains in oil were trimmed by an unexpected rise in US inventories that counterbalanced the unrest. WTI crude traded around US$71 a barrel.

“Clearly there is a lot of uncertainty,” Anna Rosenberg, head of geopolitics at Amundi Asset Management, told Bloomberg Television. “The market is still very much operating in the base-case expectation that it remains more or less contained and doesn’t spiral out in an all-out war. And I think right now, that is the right thing to do.”

For stock bulls, keeping crude costs in check will be key.

“As long as oil prices remain below US$100 per barrel and corporate profits remain strong, that is supportive of higher stock prices,” according to Mary Ann Bartels, chief investment strategist at Sanctuary Wealth. 

She expects the S&P 500 to reach 6,000 before the end of the year, “as interest rates continue to move lower and the consumer remains strong and is still spending.”

In company news, shares of Humana Inc plunged after a drop in the health insurer’s Medicare quality ratings while Nike Inc’s stock slid after the athletic wear company withdrew its full-year sales guidance. Tesla Inc fell 3.5% after its quarterly vehicle sales disappointed.

A drop in the Japanese yen deepened in the US session as the dollar strengthened. Comments from Prime Minister Shigeru Ishiba, who said conditions weren’t right for the Bank of Japan to move again following two interest rate hikes earlier this year, sparked the move.

Chinese stocks listed in Hong Kong jumped the most in almost two years after Beijing followed other major cities in relaxing home purchase rules. The massive stimulus efforts announced by China’s leaders last week turbocharged local assets and helped lift markets overseas.