Stocks close mixed after strong hiring report fuels inflation worries

Markets were mixed on Friday after a surprisingly strong jobs report renewed worries about inflation and more rate hikes from the Federal Reserve.

The S&P 500 ended down 0.1% and the Nasdaq lost 0.2% after being down even more earlier in the day. The Dow ended slightly higher, closing up by 0.1%, at 34,429. 

Stocks had been on the upswing for the last month on hopes the worst of the nation’s high inflation may have passed already. That fed expectations for the Federal Reserve to dial down the intensity of its big interest-rate hikes as it moves to slow the economy.

But Friday’s jobs report showed that wages for workers rose 5.1% last month from a year earlier, an acceleration from the 4.9% gain in October and higher than what economists had expected.

Such jumps in pay are helpful to workers struggling to keep up with soaring prices for everyday necessities. The Federal Reserve’s worry is that too-strong gains could cause inflation to become further entrenched in the economy. That’s because wages make up a big part of costs for companies in services industries, and those companies could end up raising their own prices further to cover higher wages for their employees.

“Inflation is certainly moving in the right direction,” said Adam Abbas, co-head of fixed income at Harris Associates, “but the market is still going to have to go through some calibration of the risk that we level off at 3% to 4% core inflation versus a natural, steady move down to” the 2% goal set by the Fed.

Employers also added 263,000 jobs last month, above forecasts for 200,000, while the unemployment rate held steady at 3.7%.

Fed officials have signaled that the unemployment rate needs to be at least 4% to slow inflation. It’s in the midst of raising interest rates quickly in hopes of slowing the economy just enough to undercut inflation.

Fears of more aggressive rate hikes

Expectations are rising for what the Fed will do in 2023. Treasury yields jumped immediately after the jobs report’s release on speculation the Fed may ultimately hike rates higher than thought a few moments before.

The yield on the two-year Treasury jumped to 4.29% from 4.24% late Thursday. The 10-year yield, which helps set rates for mortgages and many other loans, rose to 3.52% from 3.51%.

“Another month with a strong jobs report and torrid wage gains is a reality check for where we stand in the inflation fight,” said Mike Loewengart, head of model portfolio construction at Morgan Stanley Global Investment Office.

Aside from the job market, the economic picture has been mixed. The nation’s manufacturing activity shrank in November for the first time in 30 months, for example, and the housing industry is struggling under the weight of much higher mortgage rates. Even though Friday’s report showed hiring was stronger than expected, it also clearly demonstrated that hiring is gradually slowing from its red-hot pace earlier in the year. November’s jobs gains matched the low seen in April 2021, which was the weakest since December 2020 when the number of jobs shrank.

Signs of weakening trade, especially for export-dependent economies in Asia, have deepened worries over slowing growth in China and its implications for the global economy.

More economists are still forecasting the U.S. economy to fall into a recession next year in large part because of higher interest rates.

“While the Fed won’t back away from” a hike of just half a percentage point “in December, they still have no clue what they’ll do in 2023,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments.