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

What’s happening

• The Dow Jones Industrial Average DJIA, -0.41% shed 198 points, or 0.6%, to 34,196.
• The S&P 500 SPX, -0.65% shed 35 points, or 0.9%, to 4,041.
• The Nasdaq Composite COMP, +0.62% tumbled 128 points, or 1.1%, to 11,353.

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. However, after finishing lower on Thursday, the major indexes now look set to erase much of their weekly gains.

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, 3.589%, with the yield on the 10-year note up 5.4 basis points to 3.586%. 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.

Higher Treasury yields also dragged the dollar higher after the ICE U.S. Dollar Index DXY, +0.30%, a gauge of the greenback’s strength against a basket of rivals, rose 0.4% to 105.17.

Stocks in focus

• UiPath Inc. PATH, +14.32% shares rallied in the extended session Thursday after the “software robot” provider’s quarterly results and outlook topped Wall Street estimates.
• Shares of Cracker Barrel Old Country Store Inc. CBRL, -11.50% tumbled after the home-style restaurant chain with retail stores inside missed fiscal first-quarter profit expectations.
• PayPal Holdings PYPL, -4.13% shares were down more than 4%, making it one of the worst S&P 500 performers.