A rally in stocks faded as bond yields climbed after a strong manufacturing report offset optimism with jobs data signaling the Federal Reserve is close to ending its hiking cycle.

The S&P 500 closed with a small advance ahead of Monday’s U.S. holiday, while notching its best week since June. Tesla Inc. dropped 5 per cent, while energy shares rallied as oil topped $85 a barrel. Treasury two-year yields reversed course after falling as much as 11 basis points in the immediate aftermath of the August payrolls figures. The dollar hit a three-month high.

The jobs report showed a labor market undergoing a controlled cooling, illustrated by solid hiring, slower earnings growth and more people returning to the workforce. The moderation gives the Fed room to pause rate increases this month while keeping options open for another hike later in the year. 

“While today’s employment data were a win for the soft-landing optimists, I think it is irresponsible to assume that the Fed is out of the woods,” said Neil Dutta, head of economics at Renaissance Macro Research. “Growth remains unsustainably strong — strong growth with cyclical momentum at a time when the Fed is taking at least one of its feet off the brake pedal.”

Swap contracts still priced in a less than 50 per cent chance of another Fed hike this year — while wagers on a cut were shifted to May from June.

Fed Bank of Cleveland President Loretta Mester said inflation remains too high despite recent improvements, and the labor market is still strong. “Future policy decisions will be about managing the risks and the intertemporal costs of overtightening versus undertightening monetary policy,” she said.

‘OVERWHELMING’

To Hussain Mehdi at HSBC Asset Management, the case for a Fed pause in September is now “overwhelming.” However, it will be “difficult to dodge recession next year” amid the lagged impact of the Fed’s aggressive tightening cycle.

Mehdi is keeping “a cautious and defensive stance in portfolios.”

August jobs figures will likely be enough for Fed moderates to successfully negotiate a pause in hikes this month — but it will not assuage the hawks who are still inclined to follow through with a bit more tightening thereafter, according to Carl Riccadonna, Yelena Shulyatyeva and William Marshall at BNP Paribas.

“We do anticipate cooler macroeconomic conditions by November’s meeting to justify an extended pause,” they noted.

Meantime, BlackRock Inc.’s chief investment officer for global fixed income, Rick Rieder, said the cooling labor market supports speculation that the Fed is done raising rates — making bonds more appealing than they have been in months.

“I think you can use this as another benchmark for the fact that we are seeing slack build in the labor force” and it comes “alongside of inflation coming down,” Rieder said on Bloomberg Television Friday. “The Fed should be done. You can put your shoulder behind a bit more of interest-rate exposure than has been the case certainly over the last few months.” 

Corporate Highlights:

• Tesla revamped the Model 3 sedan with sleeker looks and longer range while slashing prices of its premium vehicles in an all-out push to boost sales.
• Amgen Inc. can move forward with its $27.8 billion takeover of Horizon Therapeutics Plc after the U.S. Federal Trade Commission said Friday that it accepted a binding settlement that the combined company won’t bundle together two of Horizon’s blockbuster drugs.
• Walgreens Boots Alliance Inc.’s Rosalind Brewer stepped down from her post as chief executive officer and board member during a rocky shift to a wider offering of health-care services while the shares have plunged.
• Charter Communications Inc., the No. 2 U.S. cable TV provider, declared war on Walt Disney Co., saying it can no longer live with rising fees for ESPN and other programming.
• Dell Technologies Inc. climbed after reporting better-than-expected sales of personal computers and data center hardware.
• Broadcom Inc., a supplier of chips to Apple Inc. and a broad swath of the tech industry, fell on a bearish outlook.
• Lululemon Athletica Inc. rose after lifting its full-year outlook as it takes business from competitors and defies the broader retail slump.
• A gauge of U.S.-listed Chinese stocks advanced after Beijing and Shanghai both eased housing rules, a sign of further government support toward the economy.

Some of the main moves in markets:

Stocks

• The S&P 500 rose 0.2 per cent as of 4 p.m. New York time
• The Nasdaq 100 was little changed
• The Dow Jones Industrial Average rose 0.3 per cent
• The MSCI World index rose 0.1 per cent

Currencies

• The Bloomberg Dollar Spot Index rose 0.4 per cent
• The euro fell 0.6 per cent to $1.0776
• The British pound fell 0.7 per cent to $1.2588
• The Japanese yen fell 0.4 per cent to 146.17 per dollar

Cryptocurrencies

• Bitcoin fell 1.5 per cent to $25,611.21
• Ether fell 1.9 per cent to $1,618.31

Bonds

• The yield on 10-year Treasuries advanced seven basis points to 4.18 per cent
• Germany’s 10-year yield advanced eight basis points to 2.55 per cent
• Britain’s 10-year yield advanced seven basis points to 4.43 per cent

Commodities

• West Texas Intermediate crude rose 2.7 per cent to $85.88 a barrel
• Gold futures were little changed