Stocks slip amid fears about high rates

Strong labor market fuels worries of inflation, losses on Wall Street

NEW YORK — Wall Street shaved off more of its strong start to the year on Monday, adding to losses from the end of last week driven by worries about higher interest rates and inflation.

The S&P 500 fell 25.40, or 0.6 percent, to 4,111.08 for its second straight fall after a stunningly strong report on the U.S. jobs market dented the market’s hopes for easing interest rates. The Dow Jones Industrial Average fell 34.99 points, or 0.1 percent, to 33,891.02, while the Nasdaq composite dropped 119.50, or 1 percent, to 11,887.45.

Some of the sharpest action was again in the bond market, where expectations are rising for the Federal Reserve to stay firm on keeping interest rates higher for longer to combat inflation. It’s something the Fed has been talking about for a long time, but also something the market has been stubborn about not believing fully.

The yield on the two-year Treasury, which tends to track expectations for the Fed, leaped. It zoomed to 4.47 percent from 4.29 percent late Friday and just 4.10 percent the day before. That’s a significant move for the bond market. The 10-year yield, which helps set rates for mortgages and other important loans, jumped to 3.64 percent from 3.52 percent late Friday.

Higher rates slow the economy by design, in hopes of limiting the purchases by households and businesses that can fuel inflation. But they also raise the risk of a severe recession and hurt markets in the meantime.

Friday’s jolting jobs report showed that U.S. employers added a third of a million more jobs than expected last month despite higher rates. Normally, such strength would be good news for markets. At the least, it should mean higher sales for many companies.

But it also raised worries a too-strong labor market will keep inflationary pressures alive and force the Fed to keep rates higher for longer. That’s in direct opposition to hopes in the market that cooling inflation could get the Fed to pause its rate increases soon and then cut rates late this year.

Such hopes had driven a big rally on Wall Street to start the year, and the S&P 500 still remains up more than 7 percent for 2023 so far. The stocks leading the way had been the ones most beaten down last year by the swift rise in rates engineered by the Fed.