Market Recap - Stocks Fall as Treasury Yields Surge

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The S&P 500 fell 1.0% this week, weighed down by a surge in bond yields, which rose to multi-year highs in front of Friday's release of the Employment Situation report for September. The tech-heavy Nasdaq and the small-cap Russell 2000 underperformed, losing 3.2% and 3.7%, respectively, but the blue-chip Dow finished flat.

Stocks began the week on a positive note, boosted by Canada joining Mexico and the United States in a trade agreement. On Sunday night, Canada agreed to allow greater dairy market access to the U.S., while also capping its automobile exports to the States. The deal, also known as the United States-Mexico-Canada Agreement (USMCA) replaces the 24-year-old NAFTA deal between the countries. However, Congress still has to approve the deal, which likely won't be easy.

Investors awoke to continued Italian drama on Tuesday, when Italy's anti-establishment government defended its plan to increase the country's budget-deficit target despite pushback from the EU. In addition, Claudio Borghi, who leads the economic policy of the ruling Lega party, claimed that most of Italy's problems could be solved if the country had its own currency -- although that idea was dismissed by Italy Deputy Prime Minister Di Maio.

However, on Wednesday, Italy's government decided to cede to some of the EU's budget demands. Italy's budget-deficit target will be reduced from 2.4% of GDP in 2019 to 2.2% in 2020 and then to 2.0% in 2021.

That news helped push bond yields higher overnight. Yields then extended those gains significantly after the September ADP Employment Change report -- a prelude to Friday's nonfarm payrolls reading -- showed an estimated 230K positions were added to private sector payrolls -- well above the consensus estimate of 184K. The ISM Services Index for September also came in better-than-expected on Wednesday, hitting a record high of 61.6% ( consensus 58.2%), clearly indicating that business activity in the service-providing sector of the economy is strong.

Yields continued to advance on Thursday and then again on Friday following the release of the Employment Situation report for September. The report showed a smaller-than-expected increase in nonfarm payrolls (134K actual vs 184K consensus), but the August increase underwent a notable upward revision (to 270K from 201K). As for the rest of the report, average hourly earnings increased 0.3% ( consensus +0.3%), the average workweek was reported at 34.5 ( consensus 34.5), and the unemployment rate dropped to 3.7% from 3.9%.

The key takeaway from the September jobs report is that the labor market is solid and still simmering with the prospect of pent-up wage pressures being unleashed at any point as employers encounter difficulty in finding qualified workers.

Looking at this week's S&P sector standings, most groups finished in negative territory. The consumer discretionary sector led the retreat with a loss of 4.2%, and information technology (-2.0%) and communication services (-2.0%) also showed relative weakness. On a positive note, the influential financial sector advanced 1.7%, benefiting from rising yields and, more specifically, a steepening of the yield curve. The benchmark 10-yr yield jumped 16 basis points in total, closing Friday at 3.23% -- which marks its highest level since 2011 -- while the 2-yr yield jumped five basis points to 2.88%.

In corporate news, General Electric (GE) replaced CEO John Flannery with former Danaher CEO Larry Culp; Tesla's (TSLA) CEO, Elon Musk, agreed to settle charges with the SEC, in which Mr. Musk and Tesla are to pay $20 million each, and Mr. Musk is to step down as chairman for three years; Amazon (AMZN) announced that it will be raising its minimum wage to $15 an hour for all U.S. employees, pressuring other retailers to do the same; and General Motors (GM) announced that it will be partnering with Honda Motor (HMC) to build autonomous vehicles.