Wall Street stocks fell on Friday and the dollar strengthened after hotter than expected US jobs numbers added to pressure on the Federal Reserve to maintain its tough stance on inflation.
The benchmark S&P 500 index fell 0.4 per cent, trimming earlier losses, while the tech-heavy Nasdaq Composite declined 0.7 per cent. Both indices had climbed earlier in the week after Fed chair Jay Powell dropped a strong hint that the central bank would slow its interest rate rises later this month.
Hopes of an early Fed “pivot” on inflation were dented on Friday, however, when data showed US non-farm employment increased by 263,000 last month, far higher than the 200,000 rise forecast by economists polled by Reuters. October’s increase was also revised higher to 284,000, from 261,000 initially reported. The unemployment rate was unchanged at 3.7 per cent.
Better news for American workers is bad news for markets. “A 0.75 percentage point rise in December has re-entered the debate,” said Steve Blitz, chief US economist at TS Lombard, referring to a jump in expectations for a 0.5 percentage point Fed rise that followed a dovish speech by central bank chair Jay Powell on Wednesday.
“These are extraordinary numbers for this point in the cycle,” Blitz added. “The economy remains strong, demand for labour remains strong and we are nowhere near having established a softness in the economy that’s going to deliver a deceleration to the base inflation rate.”
A measure of the dollar against six other main currencies slipped 0.1 per cent as traders rethought their bets that the Fed would slow its interest rate rises when it meets later this month, potentially easing an aggressive monetary tightening campaign that has sent shockwaves through global markets this year.
“The pace of US hiring alongside other measures of labour market activity such as vacancies and wage growth remain too high for the Fed’s liking,” said Hussain Mehdi, strategist at HSBC Asset Management.
“With this in mind and amid broader US economic resilience and sticky core inflation, we think speculation of a Fed pause as soon as the January-February meeting is unjustified.”
US government bonds sank along with equity futures, with the two-year yield, which is sensitive to interest rate expectations, rising as much as 0.10 percentage points to 4.35 per cent as prices of the security fell. The 10-year yield gained as much as 0.07 percentage points at 3.59 per cent.
Trading in futures markets showed that investors now think the Fed’s main policy rate will peak just below 5 per cent in June 2023, up about 0.1 percentage points from before November’s jobs data came out.
European stocks were muted, with the regional Stoxx 600 falling 0.2 per cent and London’s FTSE 100 closing flat. In Asia, Hong Kong’s Hang Seng index fell 0.3 per cent and China’s CSI lost 0.6 per cent.
