Stocks fall as strong U.S. payrolls muddies rate bets

By Sinéad Carew

NEW YORK (Reuters) – Equities took a dip on Friday while U.S. Treasury yields climbed as investors bet on a more hawkish-than-expected Federal Reserve response to a strong U.S. jobs report with employers hiring more workers than expected in November and raising wages despite recession worries.

The U.S. Labor Department reported that nonfarm payrolls increased by 263,000 jobs last month compared with economist expectations for 200,000 jobs. And average hourly earnings increases 0.6% up from 0.5% in October.

The report, which came two days after Fed Chair Jerome Powell said it could be time to slow the pace of rate hikes, made investors question whether the central banker would be able to follow through on his suggestion.

“The better-than-expected jobs report is good news for the American worker, and bad news, at least short-term, for risk assets as it supports a hawkish monetary policy by the U.S. Federal Reserve,” Tim Holland, chief investment officer at Orion Advisor Solutions in Omaha, Nebraska.

“That said, it is worth noting that the jobs report is backward looking, and that continuing jobless claims have been climbing. There is a good chance the labor market will slow meaningfully in the first half of 2023, forcing the Fed to consider a much more benign policy stance sooner than many expect.”

After the report traders were betting that the Fed seen raising its policy rate from the 3.75%-4% range to 4.92% by March 2023 and to the 5%-5.25% range by May, based on futures contract prices and the CME Fedwatch tool. Before the report, the rate was seen topping out at 4.75%-5%.

The Dow Jones Industrial Average fell 119.52 points, or 0.35%, to 34,275.49, the S&P 500 lost 26.71 points, or 0.66%, to 4,049.86 and the Nasdaq Composite dropped 105.30 points, or 0.92%, to 11,377.15.

For the week the S&P and Nasdaq were on track for their second gain in a row while the Dow was indicating a slight decline.

The pan-European STOXX 600 index lost 0.15% and MSCI’s gauge of stocks across the globe shed 0.52%.

While the dollar since lost ground gradually, it had jumped sharply after the jobs data was released.

The dollar index fell 0.01%, with the euro up 0.05% to $1.0527.

The Japanese yen strengthened 0.43% versus the greenback at 134.74 per dollar, while Sterling was last trading at $1.2275, up 0.18% on the day.

In treasuries, investors also viewed signs of a resilient labor market and rising wages as a worrisome sticky point for the Fed’s efforts to tame high inflation.

Benchmark 10-year notes were up 2.7 basis points to 3.554%, from 3.527% late on Thursday. The 30-year bond was last down 3.9 basis points to yield 3.594%, from 3.633%. The 2-year note was last was up 7.1 basis points to yield 4.3255%, from 4.254%.

Oil futures sank in Friday’s choppy session ahead of a meeting of the Organization of the Petroleum Exporting Countries and its allies (OPEC+) on Sunday and an EU ban on Russian crude on Monday.

U.S. crude fell 1.1% to $80.31 per barrel and Brent was at $85.77, down 1.3% on the day.

Gold prices slipped, also reacting to the implications for interest rates from the robust jobs data.

Spot gold dropped 0.4% to $1,795.51 an ounce. U.S. gold futures fell 0.28% to $1,796.00 an ounce.

(Reporting by Sinéad Carew and Gertrude Chavez-Dreyfuss in New York, Ankika Biswas in Bengaluru, Nell Mackenzie in London, additional reporting by Stella Qiu; Editing by Kenneth Maxwell, Toby Chopra and Alexander Smith and Marguerita Choy)