Market Snapshot: U.S. stocks slide as strong November jobs data challenges Fed to push interest rates higher

U.S. stocks traded lower on Friday, but had erased most of their early losses, after data showed the U.S. labor market remained robust in November. Read More...

U.S. stocks traded lower on Friday after showed the U.S. labor market remained robust in November despite the Federal Reserve’s interest-rate hikes.

Data released by the Labor Department showed the U.S. economy added more jobs than economists had expected, bolstering the perception that the Fed still has a long way to go before its interest-rate hikes produce their intended effect of cooling the labor market, and inflation with it.

What’s happening

The Dow Jones Industrial Average DJIA, -0.31% shed 70 points, or 0.2%, to 34,325.
The S&P 500 SPX, -0.55% shed 18 points, or 0.5%, to 4,058.
The Nasdaq Composite COMP, +0.78% tumbled 80 points, or 0.7%, to 11,402.

Stocks soared on Wednesday with the Dow climbing more than 700 points in the wake of Fed Chairman Jerome Powell’s remarks about the likelihood that the Fed will downshift to a 50 basis point interest rate hike later this month. All three major indexes looked set to finish the week in the green for the second week running.

What’s driving markets

The U.S. economy added 263,000 new jobs in November, beating expectations for 200,000 jobs, which would have been the lowest monthly number since December 2020. The prior month’s reading was also revised higher to 284,000.

But while the November report was “good news for American workers,” said Mark Hamrick, senior economic analyst at Bankrate, markets were less sanguine, with both stocks and bonds selling off.

Stocks tumbled after the data while Treasury yields shot higher as investors bet that the Fed would need to consider even more aggressive interest rate hikes. St. Louis Fed President Jim Bullard has in the past implied that the Fed funds rate, which is the central bank’s benchmark policy rate, might need to rise as high as 7%.

“Friday’s stronger-than-expected jobs report gives the Federal Reserve more reasons to continue raising interest rates and maintain tighter monetary policy for longer, at least until the labor market begins to weaken, which is a signal that the market does not want to hear right now,” said Robert Schein, chief investment officer a Blanke Schein Wealth Management.

Treasury yields rose TMUBMUSD10Y, 3.549%, with the yield on the 10-year note up 4 basis points to 3.570%. Meanwhile, the jobs data prompted some economists to anticipate a higher peak for the Fed funds rate. A team at Bank of America said they see stronger odds that the Fed will hike beyond 5%. Economists at BofA Securities said in a note that they expect the Fed funds rate will reach 5% to 5.25% by March.

See: U.S. adds 263,000 jobs in November and wages rise sharply — far too much for the Fed’s liking

Fed funds futures, which allow traders to place bets on the path of Federal Reserve policy, see the Fed funds rate peaking at 5.25% in May as the most likely scenario, according to the CME’s FedWatch tool.

Still, some market strategists see a silver lining. At the very least, the latest jobs data show that the U.S. economy has been resilient in spite of the Fed raising interest rates by 4 percentage points since the start of the year. What’s more, employment growth remained robust in the leisure, hospitality and healthcare industries, offsetting more layoffs by large technology companies.

“The report is a positive development for the economy and helps support the case that the Fed may be able to achieve a soft landing in the economy, an outcome that’s contrary to predictions made by some of the nation’s largest banks in recent months,” said Peter Essele, head of portfolio management, Commonwealth Financial Network.

The unemployment rate was unchanged at 3.7%, while wage growth over the past year accelerated to 5.1% from 4.9% during the prior month.

As Treasury yields pulled back from earlier highs, the U.S. dollar also softened, with the ICE U.S. Dollar Index down 0.1% at 104.69 in recent trade, around its lowest level since late June.