Dow sheds 400 points as strong data adds to concerns that Fed will need to be more aggressive

What’s driving markets

Strong wage growth numbers released Friday were followed up on Monday by a robust reading for the U.S. services sector — both of which helped to stoke fears that the Federal Reserve’s interest-rate hikes, along with its modest balance-sheet unwind, haven’t had much of an impact on the tight U.S. labor market.

The ISM barometer of U.S. business conditions in the service sector came in stronger than expected, rising to 56.5% in November, a strong showing that signals the U.S. economy is still expanding at a steady pace.

The ISM services figure “surprised to the upside, suggesting that the economy is still running above its long-run sustainable path and that the Fed is going to have to slow the economy more than expected in 2023,” Bill Adams, the Dallas-based chief economist for Comerica Inc.
CMA,
-5.85%,
said via phone.

In other economic data, the final November S&P Global U.S. services PMI edged up to 46.2 from 46.1, but remained in contractionary territory.

November jobs data released on Friday showed average hourly wages grew over the past year by more than 5% as of November, beating economists’ expectations and stoking concerns that robust wage growth would continue to fuel inflation, market strategists said.

Worries about a more-aggressive Fed also helped to drive Treasury yields higher, adding to the pressure on stocks. The yield on the 10-year note rose 8 basis points to 3.59% on Monday. Treasury yields move inversely to prices, and yields had fallen sharply over the past month, driven by shifting expectations about the pace of Fed rate hikes.

In other markets news, signs that China’s government is easing its COVID restrictions helped Hong Kong’s Hang Seng index
HSI,
+4.51%
finish with a 4.5% advance.

See also: Chinese ADRs and casino operators rally on signs of easing COVID

Meanwhile, crude-oil prices turned lower Monday, a day after Sunday’s decision by OPEC and its allies to keep production quotas unchanged.

Falling equity prices helped drive the CBOE Volatility Index
VIX,
+7.66%,
also known as the VIX, back above 20 on Monday. The volatility gauge had fallen sharply in recent weeks as stocks rallied, potentially signaling complacency that could ultimately hurt stocks, said Jonathan Krinsky, chief market technician at BTIG, in a note to clients.

“The SPX once again finds itself at downtrend resistance around 4,100 with VIX below 20. 10yr yields are back to key support at 3.50%. We expect both of these levels to hold, but wonder if yields break under 3.50% if it would be viewed as equity friendly as the move from 4.25% to 3.50% was?” Krinsky said.

Companies in focus

• Tesla Inc.
  TSLA,
  -5.88%
  shares tumbled 6% after reports of a looming production cut at its factory in Shanghai, though the electric-vehicle manufacturer denied the reports.

• GameStop Corp.’s Class A shares
  GME,
  -7.19%
  fell 6.2% ahead of the company’s third-quarter results, which are set to be released after the market closes on Wednesday. Analysts are looking for a narrowing loss from the videogame retailer.

• Shares of U.S. airlines and aircraft makers traded higher on Monday, bucking the broader trend in stocks. Boeing Co.
  BA,
  +1.60%
  and United Airlines Holdings Inc.
  UAL,
  +1.34%
  were among the best performers in the S&P 500, rising 1.5% and 1.7%, respectively.

––Jamie Chisholm contributed reporting to this article.