Stocks closed out the holiday-shortened week on a downbeat note, with major indexes pulling back as a stronger-than-expected August jobs report bolstered expectations that the Federal Reserve will deliver another quarter-point rate hike when it meets in mid-September. The selloff pushed the 2-year Treasury yield to a fresh 52-week high, while traders now turn their attention to next week’s Consumer Price Index reading, which could ultimately determine the central bank’s next move.
Jobs Report Beats Estimates, Fueling Rate-Hike Bets
Prior to Friday’s open, the Bureau of Labor Statistics reported that the U.S. economy added 162,000 jobs in August, blowing past economists’ consensus estimate of just 58,000. The unemployment rate, which is calculated from a separate household survey, held steady at 4.1%, matching expectations.
Adding to the strength of the report, job growth for the prior two months was revised upward. June’s payroll figure was boosted by 11,000 to a gain of 31,000, while July’s increase was revised higher by 44,000 to 21,000. Combined, that means there were 55,000 more jobs created over those two months than previously tallied.
For investors, the solid labor market data carried a double-edged quality. While a healthy jobs market signals economic resilience, it also gives the Federal Reserve more room to continue its inflation-fighting campaign. That dynamic, often described as “good news is bad news” for equities, quickly shifted market expectations for the September Federal Open Market Committee meeting.
According to CME Group’s FedWatch tool, futures traders were pricing in a 58% probability that the Fed will raise the federal funds rate by a quarter-percentage point when its meeting concludes on September 16. That marked a notable increase from the 49% probability priced in just one day earlier.
Treasury Yields Resume Their Climb
The bond market responded swiftly to the revised rate outlook. The 2-year Treasury yield, which is highly sensitive to Fed policy expectations, rose 4.3 basis points to 4.377%, establishing a new 52-week peak. Meanwhile, the benchmark 10-year Treasury yield gained 2.2 basis points to reach 4.784%.
The move higher in yields put pressure on equities across the board. The blue-chip Dow Jones Industrial Average fell 0.5% to close at 53,414. The broader S&P 500 shed 0.4% to 7,718, and the tech-heavy Nasdaq Composite gave back 0.3% to settle at 26,506.
Monday marks the Labor Day holiday, with both equity and bond markets closed for trading. The pause gives investors a moment to digest the week’s data flow before a critical stretch of economic releases arrives.
August CPI Set to Dominate Next Week’s Calendar
With the labor market proving resilient, the inflation picture now takes on outsized importance for the Fed’s decision-making process. The August jobs report effectively quelled lingering concerns about a weakening labor market, according to Jeff Schulze, head investment strategist at Franklin Templeton Institute.
“The August payroll release quelled any lingering labor fears, putting next week’s inflation data firmly in the driver’s seat for the Federal Open Market Committee’s rate decision later this month,” Schulze said.
The economic calendar kicks off Thursday morning with the release of the Producer Price Index, followed by the August Consumer Price Index on Friday morning. The CPI report arrives just days before the Fed’s September meeting, making it one of the most consequential data points of the summer.
Deutsche Bank economists project that PPI rose 0.2% from July to August, representing a 3.3% year-over-year increase. For headline CPI, the economists anticipate a 0.4% monthly gain and a 3.4% annual increase, with rising energy prices expected to provide a meaningful boost to the headline figure.
Should inflation come in hotter than anticipated, it would likely cement expectations for a September rate hike and potentially lead traders to price in additional tightening later in the year. Conversely, a cooler reading could provide relief for equities and temper the recent surge in Treasury yields.
Lululemon Suffers Worst Day in a Year After Earnings Miss
In single-stock news, Lululemon Athletica plunged 17.4% Friday, marking its worst trading day in a year, after the athletic apparel retailer delivered disappointing fiscal second-quarter results. The sharp decline adds to what has already been a difficult year for the consumer discretionary stock, which is now down nearly 50% year to date.
For its fiscal second quarter, Lululemon reported earnings of $2.06 per share, a 33.5% decline compared with the same period last year. Revenue also fell short of expectations, slumping 4% to $2.4 billion. Comparable sales, a key retail metric, were down 9% year over year.
Adding to investor concerns, the company guided toward further contraction in both its top and bottom lines for the fiscal third quarter. Lululemon also lowered its full-year outlook, citing ongoing challenges in its core markets.
Interim co-CEO and Chief Financial Officer Meghan Frank acknowledged the company’s struggles during the earnings call, stating, “We know there is much more work to be done. We’re excited our incoming CEO, Heidi O’Neill, joins us next week. And we expect she will take a deep dive into the business, evaluating our strategy and current action plans.”
Frank noted that in the near term, the company remains focused on execution as it navigates a challenging retail environment.
Despite the steep decline in share price, some analysts are cautioning investors against viewing the pullback as a buying opportunity. UBS Global Research analyst Jay Sole expressed skepticism about the stock’s near-term prospects, saying, “We don’t believe a pullback represents a good buying opportunity. The main reason is we see big earnings-per-share downside over the near term and also see little upside risk.”
Guidewire Sinks 20% on Soft Revenue Guidance
Elsewhere on the earnings calendar, Guidewire Software tumbled 20% Friday, registering one of its largest one-day losses on record, following the release of its fiscal fourth-quarter results. The cloud-based insurance platform provider beat expectations on both earnings and revenue, but its fiscal 2027 first-quarter revenue guidance came in below Wall Street’s projections.
The market’s harsh reaction to the guidance overshadowed what analysts described as a solid end to the fiscal year. William Blair analyst Dylan Becker, who maintains an Outperform (Buy) rating on the stock, highlighted several positive aspects of the report.
“Guidewire reported a strong close to its fiscal year with all key metrics ahead of expectations, a record 26 cloud deals in the fourth quarter, and accelerating customer adoption of the company’s early agentic offerings,” Becker said.
Becker added that Guidewire “remains uniquely positioned as the trusted system of record for the P&C economy, supported by increasing momentum across carrier tiers, product offerings, and cloud migration activity.” He believes these factors will drive long-term growth for the company despite the near-term guidance shortfall.
The divergent reactions to Guidewire and Lululemon’s earnings illustrate how investors are rewarding companies that demonstrate clear growth trajectories while penalizing those that signal weakness or uncertainty. As the market heads into the heart of September, individual stock stories will continue to take a backseat to the broader macro narrative.
With the Fed’s September meeting now less than two weeks away, the upcoming CPI report looms as the decisive data point that could shape the trajectory of both equity and bond markets into the final quarter of the year. A hotter-than-expected inflation print would likely reinforce the case for another rate hike and keep upward pressure on Treasury yields, a scenario that tends to weigh on stock valuations. On the other hand, a softer reading could revive hopes that the Fed is nearing the end of its tightening cycle, potentially providing the catalyst equities need to regain their footing after a week of losses. For now, investors are left to navigate the uncertainty with the labor market showing strength and inflation still running above the Fed’s target, a combination that keeps the risk of further policy tightening firmly on the table.
