(Bloomberg) -- Emerging market stocks slipped Friday to finish their worst week since July after a weak US jobs report intensified the risk-off mood on fears the Federal Reserve may have waited too long to cut interest rates.
A gauge for developing nation equities closed 0.1% lower on the day — and slumped 2.3% for the week — while a companion index for currencies rose 0.3% in its third-straight session of gains.
Nonfarm payrolls rose by 142,000, less than forecast, and previous months were revised lower. Friday’s data added to soft readings from regional Fed and ISM surveys, and a gloomy Beige Book earlier this week. Fed Bank of New York President John Williams said it is now appropriate for the central bank to reduce interest rates. But many still expect that move to be a quarter-point.
“The August NFP was not good enough to reduce fears the Fed may be behind the curve and reacting too slowly to softer US labor market condition,” said Elias Haddad, a senior markets strategist at Brown Brothers Harriman. “The cloudy US employment outlook will likely further weigh on risk assets, like EM.”
Earlier, the MSCI EM currency index rallied following the data release, with several Latin American currencies pacing gains. But as concern over the strength of the US economy grew, currencies erased the advances. The Mexican peso underperformed due to its reliance on the US economy and a jump in the Japanese yen.
The index’s gains were also backed by the Chinese central bank’s stronger yuan fixing. The yuan climbed after the PBOC set the yuan reference rate at 7.0925 per dollar, compared with an estimate of 7.0921 in a Bloomberg survey. The fixing was the strongest since Jan. 2.
Fed Cut Debate
Emerging-market traders will turn to the Fed’s two-day meeting starting Sept. 17 with swap traders debating whether officials will deliver a jumbo-sized cut of 50 basis points.
Fed Governor Christopher Waller said on Friday he’s “open-minded” about the potential for a bigger rate cut, and would back one if appropriate. Bets on a half-point-cut this month briefly gained momentum after Waller’s remarks, but then faded again.
The prevailing view is that the labor market is indeed cooling — but it’s not weak enough to warrant an aggressive move from officials at this point, which led traders to pare bets and move away from risk assets.
“The data confirms that the US economy is gradually slowing down, particularly on the jobs front — but not in a strong way — and guarantees that the Fed can start an easing cycle,” said Marco Oviedo, senior Latin America strategist at XP Investimentos.
--With assistance from Leda Alvim.
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