S&P 500, NASDAQ Wavering as Traders Assess Impact of Jobs Data on Fed Policy

The major U.S. stock indexes are lower shortly after the opening on Friday after a shockingly strong U.S. jobs report indicated the Federal Reserve may need to keep interest rates elevated to control inflation. The markets are also being capped by disappointing earnings from Google, Apple and Amazon, released after the close on Thursday.

At 14:45 GMT, the blue chip Dow Jones Industrial Average is trading 34023.78, down 30.16 or -0.09%. The benchmark S&P 500 Index is at 4155.22, down 24.54 or -0.59% and the tech-weighted NASDAQ Composite is trading 12089.54, down 111.28 or -0.91%.

Non-Farm Payrolls Overshoot Economists’ Expectations

The closely watched U.S. Non-Farm Payrolls report showed U.S. employers added 517,000 new workers in January, vastly overshooting expectations of economists polled by Reuters for a 185,000 gain.

The Unemployment Rate fell from 3.5% to 3.4%, versus an estimate of 3.6%. Average hourly wages, which analysts and investors focus on for clues about whether a tight labor market may continue to fan the flames of inflation, rose 0.3%, matching economists’ forecasts. The prior month was revised upward to 0.4%.

US Treasury Yields Soar

U.S. Treasury yields jumped Friday after jobs data came in much better than expected. The 10-year Treasury yield was up about 11 basis points (bps) at 3.512%. The 2-year Treasury was up around 16 basis points to 4.253%.

The Fed hiked its benchmark interest rate by 25 bps to a range of 4.5% to 4.75% on Wednesday, taking benchmark borrowing costs to their highest level since late 2007, and signaled more hikes to follow.

Federal Reserve policymakers have been saying that rates may have to rise above 5.0% in order to tame inflation and the jobs market. This means another 25 basis point rate hike in March and June.

The market, however, believes the Fed could stop in March after a 25 basis point rate hike. And could even start cutting rates before the end of the year.

This suggests the next major move in the stock market will be determined by the January consumer inflation report. In other words, the market will become more data dependent until the next Fed meeting in March.

Tech Shares Take a Beating

U.S. tech shares took a beating in after-hours trading on Thursday in a move that carried over into Friday’s session. Dragging the S&P 500 and NASDAQ Composite lower was Apple, which projected another revenue decline in the start of the year. Additionally, Amazon warned that its operating profit could fall to zero in the current quarter. Google parent Alphabet also missed fourth-quarter profit and revenue expectations.

Short-Term Outlook

The jobs report is open to interpretation so it’s better to let Treasury yields determine the direction of the market on Friday.

The surge in non-farm payrolls could be interpreted as bullish for the economy especially since the Fed may be nearing the end of its interest rate hiking cycle. Or it could mean the Fed is going to have to stay aggressive in order to gain control of inflation.

However, looking at the reaction in the Treasurys, it looks as if investors are betting on more rate hikes, which could put short-term pressure on stocks.