Rally hits a wall of hot jobs, cold earnings data

Wall Street’s big rally to start the year wilted on Friday after a surprisingly strong jobs report fueled worries about inflation and higher interest rates.

The S&P 500 fell 1% for its first drop in four days, though it took an up-anddown route to get there. The bond market was more decisive in thinking the strong jobs data could push the Federal Reserve to stay firmer than expected on high interest rates, which hurt the economy and markets.

The Dow Jones Industrial Average dropped 127 points, or 0.4%, while the Nasdaq composite sank 1.6%.

The market already looked like it was set to weaken coming into the day, before the jolting jobs report dropped. Late Thursday, several Big Tech companies among Wall Street’s most influential reported weaker profit for the latest quarter than analysts expected.

That cast concerns over a rally that had brought the S&P 500 back to its highest level since August, driven by hopes that cooling inflation may get the Federal Reserve to take a pause soon on its hikes to interest rates and possibly even cut them by late this year.

Then came the jobs report, which showed employers created a net 517,000 jobs last month. That was way above the 185,000 that economists expected and a sharp acceleration from December’s 260,000 jobs.

Normally, a strong jobs report is good for Wall Street because it means the economy is on firmer footing. But in this upsidedown post- COVID world, it could also be a worrisome sign. The Fed is in the middle of trying to cool down the job market, in hopes of taking pressure off inflation.

The concern in the market is that the much stronger-than- expected hiring could keep the Fed on the “higher-for-longer” path on interest rates that it’s been talking about, even if markets haven’t been believing it fully.

“It’s going to get harder to argue that rate cuts may be in 2023’s future if the labor market is able to continue like this, especially considering that it remains to be seen how quickly inflation will fall, even if we have reached the peak,” said Mike Loewengart, head of model portfolio construction at Morgan Stanley Global Investment Office.

Treasury yields zoomed higher immediately after the jobs report on forecasts for a firm Fed. The yield on the two-year Treasury, which tends to track expectations for the Fed, jumped to 4.30% from 4.10% late Thursday. The 10-year yield, which helps sets rates for mortgages and other important loans, rose to 3.53% from 3.40%.