U.S. stocks fell Friday morning after stronger-than-expected jobs data prompted investors to recalibrate their expectations around when the Federal Reserve will pause its rate hike campaign.
The Labor Department’s monthly jobs report for November showed payrolls rose 263,000, more than expected, while unemployment held steady at 3.7%. Bloomberg expected an impression of 200,000 for the month.
The S&P 500 (^GSPC) fell 1.4%, while the Dow Jones Industrial Average (^DJI) fell 1.1%, or nearly 400 points. The tech-heavy Nasdaq Composite (^IXIC) slipped 1.8%. Elsewhere in the markets, US Treasury yields rose after the release. The benchmark 10-year treasury rose above 3.6% and the 2-year rate-sensitive yield rose above 4.4%.
“Another strong jobs report and strong wage growth confirm that the Fed’s job is not yet done,” said Ron Temple, head of U.S. equities at Lazard Asset Management. “Investors need to reevaluate their optimism regarding the end of terminal rate tightening, and how long the Fed is keeping rates there.”
Friday’s moves in early trade come after an upbeat week for equity markets, with sentiment bolstered by Federal Reserve Chairman Jerome Powell’s indication of a moderation in the pace of interest rate hikes, and China easing some COVID lockdowns following unrest over restrictive virus controls.
But the jobs report appeared to throw a wrench in the market’s plans for weekly gains and a so-called Santa Claus rally, as stocks tended to surge ahead of the holidays. The stronger-than-expected jobs numbers, along with continued strong wage growth, provided fresh signals that the Fed would continue its interest rate hike campaign even if it slowed the pace.
For the month, stocks got off to a lackluster start, with a mixed close on major averages on Thursday, the first day of December. However, according to Ryan Detrick of the Carson Bandno month is more likely to see the S&P 500 end with a gain than December: the benchmark has been up for the month 75% of the time since 1950.
Treasury Secretary Janet Yellen at a conference earlier this week in New York said the jobs report is the most important data point – besides inflation data – that the policymakers watch to determine monetary decisions as they take steps to restore price stability.
“The U.S. labor market is starting to show tentative signs of a slowdown, but only at the margins,” DataTrek’s Nicholas Colas said in a newsletter sent Friday, calling the jobs report “an important data point. ” to monitor.
Central bankers have been scrambling to ease labor market tensions driven by excessive job vacancies, which have put upward pressure on wages and contributed to soaring prices. But many worry that the labor market dynamics that have encouraged officials to pursue aggressive rate hikes could cause them to overshoot and tip the U.S. economy into a recession.
In his 2023 economic outlook earlier this year, Michael Gapen of Bank of America warned that labor market dynamics could see the federal funds rate hit 6%, even as the bank’s forecast calls for a terminal rate of 5.00 to 5.25% by May. .
While employment numbers have so far reflected the resilience of the U.S. employment picture, economists expect job growth to trend lower as the impact of rising interest rates is catching up. BofA expects the unemployment rate to hit 5.5% in 2023, while Morgan Stanley expects 4.3% and Goldman Sachs forecasts a half-percentage-point rise to 4.2% .
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Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc
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