Stocks tumble, U.S. bond yields rise on strong jobs report

© Reuters. Men walk past an electric board displaying Nikkei and other countries’ indexes outside a brokerage in Tokyo, Japan January 16, 2023. The characters on the screen reads,”government bonds”. REUTERS/Kim Kyung-Hoon

By Chuck Mikolajczak

NEW YORK (Reuters) – A gauge of global stocks dropped more than 1%, while U.S. Treasury yields and the dollar shot higher on Friday after a shockingly strong U.S. jobs report renewed concerns the Federal Reserve may stay aggressive in its interest rate hike path as it tries to tame inflation.

The report from the Labor Department showed nonfarm payrolls surged by 517,000 jobs in January, well above the 185,000 estimate of economists polled by Reuters, with data for December also being revised higher. Average hourly earnings increased 0.3%, as expected, down from the 0.4% in the prior month, while the unemployment rate of 3.4% was the lowest since 1969.

Equities have rallied to start the year on expectations the Fed may be forced to pause or even pivot from its rate hikes in the back half of the year, growing more confident after comments from Fed Chair Powell on Wednesday that acknowledged the “disinflationary” process may have begun. Additional fuel was added after policy announcements by the European Central Bank (ECB) and Bank of England (BoE) on Thursday.

“This make the Fed’s job more difficult. Their dependence on the data yet to come has increased, no doubt,” said Russell Price, chief economist at Ameriprise Financial in Troy, Michigan.

“They’re concentrating on the labor market right now, they want to see labor cost inflation under control, and this report does not suggest that labor cost inflation in particular is going to improve significantly anytime soon.”

Interest rate futures now indicate the Fed is likely to deliver at least two more rate hikes, taking the benchmark rate to above 5%.

U.S. stocks opened lower after the report, with additional downward pressure being supplied by a 2.83% decline in Google parent Alphabet (NASDAQ:GOOGL) and a 7.70% drop in Amazon (NASDAQ:AMZN) after their quarterly results.

Apple (NASDAQ:AAPL), however, helped prevent further declines, as the stock erased losses in premarket trading to trade 2.74% higher following its quarterly earnings.

Earnings are now expected to decline 2.7% for the quarter from the year-ago period, according to Refinitiv data, down from the 1.6% fall expected at the start of the year.

Other data showed the U.S. services industry rebounded strongly in January, according to the Institute for Supply Management (ISM).

The Dow Jones Industrial Average fell 167.55 points, or 0.49%, to 33,886.39; the S&P 500 lost 44.72 points, or 1.07%, to 4,135.04; and the Nasdaq Composite dropped 176.41 points, or 1.45%, to 12,024.41.

Even with Friday’s declines, both the S&P 500 and Nasdaq were on track for weekly gains. The Nasdaq was poised for a fifth straight week of gains, it’s longest since October-November 2021.

European stocks closed modestly higher, erasing earlier declines on optimism over the region’s economy. The pan-European STOXX 600 index rose 0.34% but MSCI’s gauge of stocks across the globe shed 1.08%. The STOXX index closed with a 1.23% gain on the week for its highest closing level since April 21. MSCI’s index was on track for a second straight weekly advance even with Friday’s tumble.

U.S. Treasury yields climbed after the payrolls report, with those on the benchmark 10-year note up 13.2 basis points to 3.530%, from 3.398% late on Thursday, poised for their biggest one-day jump since Oct. 19.

The greenback strengthened in the wake of the data, climbing off a nine-month low hit on Thursday to 109.92, its highest since January 12, with the dollar index rose 1.071% and the euro down 0.93% to $1.0808.

The Japanese yen weakened 1.88% to 131.11 per dollar, while Sterling was last trading at $1.2058, down 1.35% on the day.

Crude prices turned lower in part due to strength in the dollar and concerns about higher interest rates, with Brent and WTI poised for weekly declines of about 7%.

U.S. crude fell 3.15% to $73.49 per barrel and Brent was at $79.92, down 2.74% on the day.