Stocks turned mixed and Treasury yields continued rising Friday, with much of Wall Street seeing the Federal Reserve on course to raise interest rates as soon as March despite a mixed report on the U.S. jobs market.
The S&P 500 was 0.2% lower in afternoon trading, and the yield on the 10-year Treasury was at its highest level since COVID-19 began pummeling markets at the start of 2020. The benchmark index fell as much as 0.7% earlier in the day, following the mixed reading from the U.S. Labor Department, which is usually the most anticipated piece of economic data every month.
Employers added only about half the number of jobs last month that economists expected, a seeming negative for the economy. But average wages rose more for workers than expected. On the whole, many investors saw it as evidence that the jobs market is strong enough for the Federal Reserve to continue leaning toward raising interest rates more quickly off their record lows. But, there’s still much debate about when and how aggressive it will be in those moves, leading to markets sloshing around.
“We’re just in a great amount of uncertainty around what the Fed is going to do,” said Yung-Yu Ma, chief investment strategist at BMO Wealth Management.
Higher rates could help corral the high inflation sweeping the world, but they would also mark an end to the conditions that have put financial markets in “easy mode” for many investors since early 2020.
Immediately after the report’s release, Treasury yields continued the sharp climbs they’ve been on this week as expectations have built for the Fed to raise rates more quickly. The yield on the 10-year Treasury hit 1.76%, up from 1.73% late Thursday. It touched its highest level since January 2020, according to Tradeweb.
Investors are now pricing a better than 79% probability that the Fed will raise short-term rates in March. A month ago, they saw less than 39% of a chance of that, according to CME Group.
"The miss (on job additions) was not big enough to change any of the plans of Fed as far as the tightening cycle goes," said Cliff Hodge, chief investment officer for Cornerstone Wealth.
Brian Jacobsen, senior investment strategist at Allspring Global Investments, pointed to how hourly wages for workers in the leisure and hospitality businesses were up 14% from a year earlier. That's a strong leap for a group that accounts for roughly one of every eight workers in the private sector.
“It’s a strong report,” Jacobsen said, “and probably confirms for the Fed” that it should remain biased more toward raising rates than continuing to pump massive amounts of aid into the economy.
Record-low rates have been a major reason for the stock market's run to records since the pandemic struck. When bonds are paying little in interest, people are wiling to pay higher prices for stocks and other investments.
That's why any potential rate increase raises nervousness, though the Fed has clearly telegraphed it may raise rates three times in 2022. It has already slowed monthly purchases of bonds it's making to lower longer-term interest rates, and minutes released this week from its last meeting showed the Fed may dump such purchases off its balance sheet more quickly this time.
The Dow Jones Industrial Average rose 105 points, or 0.3%, at 36,341, as of 1:57 p.m. Eastern time, after earlier flipping between a gain of 146 points and a loss of 124. The Nasdaq composite shed 0.8% and is on track for its biggest weekly loss since late February.
The Nasdaq has more technology stocks than other indexes, and such companies tend to be hurt more by rising interest rates. It's the flip side of the benefit they had through much of the pandemic, when low rates pushed investors to pay higher prices for companies able to grow regardless of the economy's strength. Low rates also made investors more willing to buy companies whose big expected profits may take years to come to fruition.
Tesla and Nvidia both sank more than 2.7% and were among the heaviest weights on the S&P 500.
Stock markets elsewhere in the world were mixed.
Germany's DAX lost 0.6%, while South Korea's Kospi rose 1.2% and Japan's Nikkei 225 was nearly unchanged.
A resurgence of coronavirus outbreaks has added to uncertainties over a revival of tourism and other business activity in many parts of the world including Asia. The World Health Organization says a record 9.5 million COVID-19 cases were tallied over the last week as the omicron variant of the coronavirus swept the planet, a 71% increase from the previous 7-day period that the U.N. health agency likened to a “tsunami.”
Germany’s leaders were set to consider possible new restrictions and changes to quarantine rules as the new omicron variant was quickly advancing.
Japan approved new restrictions on Friday to curb a sharp rise in coronavirus cases in the three most affected southwestern regions of Okinawa, Yamaguchi and Hiroshima.
AP Business Writer Elaine Kurtenbach contributed.