The major averages finished modestly lower on Friday as a stronger-than-expected August Employment Report increased expectations for a September rate hike, interrupting some of the positive momentum from Thursday's broad advance. The S&P 500 (-0.4%), Nasdaq Composite (-0.3%), and DJIA (-0.5%) ended in negative territory, while the Russell 2000 (+0.3%) and S&P Mid Cap 400 (+0.1%) bucked the broader weakness with modest gains.

The employment report showed stronger-than-expected payroll growth and a lower-than-expected unemployment rate, prompting a meaningful shift in expectations for the Fed's next policy move. The CME FedWatch Tool assigned roughly a 60% probability to a rate hike at the September FOMC meeting, up from about 50% yesterday. Cleveland Fed President Beth Hammack (voting FOMC member) added to the more hawkish policy backdrop, saying inflation remains too high, the labor market is stable, and current policy is not restrictive before concluding that "it's time to act."

Mega-cap stocks were mostly lower today, with the Vanguard Mega Cap Growth ETF finishing 0.5% lower. The consumer discretionary sector (-1.3%) was among the weakest performers as Tesla (TSLA 354.08, -22.28, -5.92%) gave back yesterday's rally and lululemon athletica (LULU 100.61, -21.16, -17.38%) plunged following its earnings report.

The communication services sector (-0.9%) also struggled amid weakness across some of its largest components, while the financials sector (-0.8%) was another notable laggard.

The information technology sector (+0.2%) managed to finish higher despite a pronounced split beneath the surface. Semiconductor stocks rallied sharply, lifting the PHLX Semiconductor Index 3.4%, while software stocks moved firmly in the opposite direction and left the iShares GS Software ETF down 2.2%. Adobe (ADBE 266.51, -19.24, -6.73%) was among the software laggards after naming a new CEO.

Memory stocks were particularly strong within the semiconductor group. Sandisk (SNDK 1740.00, +185.01, +11.90%) surged more than 10% to finish as one of the day's top gainers amid stronger DRAM and NAND pricing, robust server demand, broader strength across semiconductors, and a technical rebound from key moving averages.

Strength across semiconductor-related names also provided a boost to the industrials sector (+0.4%), which finished among the day's better-performing areas.

Separately, credit bureau and credit-scoring stocks were a notable pocket of weakness following comments from FHFA Director Bill Pulte regarding potential changes to the mortgage credit-scoring market. FICO tumbled after Mr. Pulte said Fannie Mae and Freddie Mac will allow all lenders to use VantageScore, increasing competition for Fair Isaac's (FICO 932.26, -186.67, -16.68%) mortgage-scoring business. Equifax (EFX 177.05, -12.04, -6.37%) and TransUnion (TRU 79.88, -5.04, -5.94%) also fell sharply after Mr. Pulte criticized credit reporting agencies over pricing and said he is considering a "bi-merge" system that would require mortgage lenders to pull two credit reports instead of three.

Meanwhile, WTI crude settled $0.15 higher (+0.2%) at $91.50 per barrel amid a relative lack of new developments surrounding the U.S.-Iran conflict. Crude gained roughly 10% for the week, with its sharp rise contributing to the equity market's weakness during the first half of the week.

Friday's modest decline ultimately left the major averages with a mixed finish to the week after a volatile stretch shaped by rising oil prices, elevated Treasury yields, and shifting expectations for monetary policy. Attention will remain firmly on the rate outlook next week, with the August Producer Price Index and Consumer Price Index providing the next major opportunities for expectations surrounding the September FOMC meeting to shift. The abbreviated week will be relatively light on the earnings front, although Oracle (ORCL 158.83, +4.79, +3.11%) reports after Thursday's close.

U.S. Treasuries finished the week on a lower note after a strong jobs report for August prompted a reversal from a modestly higher start. The 2-year note yield settled up five basis points to 4.38% (+3 basis points this week), and the 10-year note yield settled up two basis points to 4.78% (+6 basis points this week). 

• Russell 2000: +19.9% YTD
• S&P Mid Cap 400: +14.5% YTD
• Nasdaq Composite: +14.1% YTD
• S&P 500: +12.8% YTD
• DJIA: +11.1% YTD

Reviewing today's data:

• August Nonfarm Payrolls 162K (Briefing.com consensus 45K); Prior was revised to 21K from -23K, August Nonfarm Private Payrolls 127K (Briefing.com consensus 45K); Prior was revised to 71K from 30K, August Unemployment Rate 4.1% (Briefing.com consensus 4.2%); Prior 4.1%, August Average Hourly Earnings 0.3% (Briefing.com consensus 0.2%); Prior was revised to 0.2% from 0.1%, August Average Workweek 34.4 (Briefing.com consensus 34.3); Prior 34.3
  • The quick takeaway by the market is that this report just might persuade the Fed to raise rates at its September FOMC meeting. The key takeaway, though, is that a rate hike in September is not assured by this August data. To that end, the 3-month average for total nonfarm payrolls was still just a modest 71,000, there was a moderation in average hourly earnings growth to 3.1% from 3.2% on a year-over-year basis, and persons unemployed for 27 weeks or more accounted for 27.0% of the unemployed versus 25.5% in July.