Wall Street’s rally stalls on hot jobs, cold earnings data

A security guard is seen next to a road block near the New York Stock exchange, Friday, Jan. 14, 2022, in the Financial District. (AP Photo/Mary Altaffer, File)

NEW YORK (AP) — Wall Street's rally is stalling Friday, as a stunningly strong report on the U.S. job market sends investments on another dizzying roller-coaster ride.

Stocks opened with sharp losses and then erased them all, before falling back again. The bond market, meanwhile, was more decisive in thinking the strong jobs data may push the Federal Reserve to get firmer on high interest rates, which hurt the economy and markets.

The S&P 500 was 0.4% lower in midday trading after earlier being down as much as 1.2%. The Dow Jones Industrial Average was virtually flat at 34,054, as of noon Eastern time, while the Nasdaq composite was 0.5% lower.

The market already looked like it was set to weaken before the jolting jobs report dropped. Late Thursday, several of Wall Street’s most influential companies 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 226,000 jobs.

Normally, a stronger jobs report is good for Wall Street because it means the economy is on firmer footing. But in this upside-down post-COVID world, it could 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 firmer Fed. The yield on the two-year Treasury, which tends to track expectations for the Fed, jumped to 4.24% from 4.10% late Thursday. The 10-year yield, which helps sets rates for mortgages and other important loans, rose to 3.51% from 3.40%.

The reaction was much more muted in the stock market.

Some analysts said they were paying more attention to the data on wages in the jobs report than on overall hiring, which wasn’t as surprising.

Average hourly earnings for workers were 4.4% higher in January than a year earlier. That’s a slowdown from December’s 4.8% raise, though it was a touch above expectations. Slower wage gains can mean less pressure on inflation, though it hurts workers trying to keep up with rising prices at the register.

“The Fed has been downplaying the importance of the unemployment rate and payrolls number, focusing more on wage gains instead,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments. “Wage gains were in line with the consensus expectations, so I’m not as worried as most about the path ahead for the Fed.”

Also helping to muddy the picture was a report showing the U.S. services sector returned to growth in January. It was a much stronger reading than expected, though it also suggested pricing pressures may be easing.

Drops for some Big Tech stocks were weighing on the market following weaker-than-expected earnings reports.

Amazon fell 4.7% and was one of the biggest weight on the S&P 500, while Google's parent company slipped 0.6%. Because they're among the most valuable stocks on Wall Street, their movements carry more weight on the S&P 500 than others.

On the winning side was Clorox, which jumped 7.3% after reporting much stronger profit for the end of 2022 than expected.

Even with Friday's stall, the S&P 500 is still heading for its fourth winning week in the last five. It's also on pace for its first back-to-back weekly gains of at least 2% since October.

——

AP Business Writers Yuri Kageyama and Matt Ott contributed.