Stocks close mixed after a strong hiring report fuels inflation concerns

Markets were mixed on Friday after a surprisingly strong jobs report sparked renewed concerns about inflation and further rate hikes by the Federal Reserve.

The S&P 500 ended down 0.1% and the Nasdaq lost 0.2% after falling even lower earlier in the day. The Dow closed slightly higher, closing up 0.1% at 34,429 points.

Stocks have rallied for the past month on hopes that the worst of the country’s high inflation may be over. This fueled expectations that the Federal Reserve would reduce the intensity of its large rate hikes to slow the economy.

But Friday’s jobs report showed wages for workers rose 5.1% last month from a year earlier, accelerating from the 4.9% rise in October and higher than economists had expected.

Such salary jumps are helpful for workers who are struggling to keep up with rising prices for everyday necessities. The Federal Reserve fears that excessive earnings could allow inflation to become more entrenched in the economy. That’s because wages are a large part of the cost for companies in the service industry, and those companies could end up raising their own prices further to cover higher wages for their employees.

“Inflation is certainly moving in the right direction,” said Adam Abbas, co-head of fixed income at Harris Associates, “but the market has yet to undergo some calibration of the risk we settle in at 3% versus 4% core inflation.” natural, steady downward movement towards the 2% target set by the Fed.

Employers also added 263,000 jobs last month, ahead of forecasts of 200,000, while the jobless rate stayed steady at 3.7%.

Fed officials have signaled that the unemployment rate needs to be at least 4% to curb inflation. It’s raising interest rates quickly in hopes of slowing the economy just enough to undercut inflation.

Remote jobs are still in high demand in the US 03:52

Fear of more aggressive rate hikes

Expectations of what the Fed will do in 2023 are mounting. Treasury yields rose immediately after the jobs report was released on speculation that the Fed may eventually hike higher than recently thought.

The yield on the two-year government bond rose to 4.29% from 4.24% late Thursday. The 10-year yield, which helps set interest rates on mortgages and many other loans, rose to 3.52% from 3.51%.

“Another month of a strong jobs report and surging wage growth is a reality check on where we stand in the fight against inflation,” said Mike Loewengart, head of model portfolio construction at Morgan Stanley Global Investment Office.

Fed hints at slower rate hikes 04:40

Apart from the labor market, the economic picture is mixed. The country’s manufacturing activity contracted in November for the first time in 30 months and the housing industry is struggling under the weight of much higher mortgage rates. Although Friday’s report showed that the hiring rate was higher than expected, it also clearly showed that the hiring rate is gradually slowing from its blistering pace earlier in the year. November job gains touched the April 2021 low, which was the weakest since December 2020, when jobs shrank.

Signs of weakening trade, particularly for export-dependent economies in Asia, have heightened concerns about slowing growth in China and its impact on the global economy.

A growing number of economists are forecasting that the US economy will fall into recession over the next year largely due to higher interest rates.

“While the Fed won’t back down from “a hike of just half a percentage point” in December, it still has no idea what it will do in 2023,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments.

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