Wall Street stumbles after hot jobs data raises threat of high rates

NEW YORK: Stocks are falling Thursday after reports suggested the US job market remains much more resilient than expected.

The S&P 500 was 1.1 per cent lower in afternoon trading. The Dow Jones Industrial Average was down 434 points, or 1.3 per cent, at 33,854, as of 12:16 p.m. Eastern time, and the Nasdaq composite was 1.2 per cent lower.

While a sturdy labour market keeps the economy out of a long-feared recession, it could also push the Federal Reserve to keep interest rates higher for longer in its campaign to defeat high inflation. That in turn could mean more pressure down the line on the economy and financial markets.

A report from ADP Research Institute suggested hiring by private employers was much stronger last month than economists expected, with nearly twice as many jobs created than forecast.

The ADP report can be volatile and "isn't necessarily a good predictor of the monthly jobs report" that is more comprehensive and due from the US government on Friday, said Mike Loewengart, head of model portfolio construction at Morgan Stanley Global Investment Office.

But it also paired with a separate report showing the number of US workers applying for unemployment last week remains low relative to history, even if it was a bit higher than expected.

Other reports on Thursday offered a nuanced picture. One from the US government said employers advertised fewer job openings in May than expected. That could mean less upward pressure on inflation, though the data also showed more people quit their jobs. That could be a signal of a strong job market.

A separate report from the Institute for Supply Management said growth in US services industries remains hot and accelerated in June, with strength stretching from arts, entertainment and recreation to construction. On the plus side for investors, it also showed prices paid by services companies are growing at a slower rate, which could be an encouraging signal for inflation.

Thursday's pullback for Wall Street follows a 16 per cent rally for the S&P 500 in the first half of the year built amid relief that the economy has remained solid despite much higher interest rates.

The Federal Reserve has raised its federal funds rate by a mammoth 5 percentage points from virtually zero early last year to smother the worst inflation in decades. High interest rates work by slowing the entire economy, and unanticipated cracks often appear in areas of the economy under the pressure.

The Fed's breakneck pace over the last 16 months has already helped caused several failures in the US banking system, as well as hits to the housing market and other corners of the economy. The hope on Wall Street had been that slowing inflation would mean the Fed would hike rates just one or two more times before cutting them early next year.

Thursday's surprisingly hot data could push the Fed to keep rates high for longer than previously expected.

Yields jumped in the bond market on such expectations. The yield on the 10-year Treasury rose to 4.07 per cent from 3.94 per cent late Wednesday. It helps set rates for mortgages and other important loans.

The two-year Treasury yield, which moves more on expectations for the Fed, leaped to 5.05 per cent from 4.95 per cent. It's back to where it was in early March, before the failures of Silicon Valley Bank and other banks rattled confidence across financial markets.

On Wall Street, bank stocks slid to some of the sharpest losses amid worries about higher interest rates. Comerica dropped 4.1 per cent, PacWest Bancorp slid 7.6 per cent and KeyCorp fell 3 per cent.

Big tech stocks also tend to be some of the hardest hit by high interest rates, along with other high-growth stocks. A 1.5 per cent drop for Amazon and 1.7 per cent fall for Tesla were two of the heaviest weights on the S&P 500.

JetBlue Airways tumbled 6.5 per cent after it said it will end a partnership with American Airlines in the northeastern United States after losing a court fight over the deal, as it focuses instead on salvaging its proposed purchase of Spirit Airlines. American Airlines fell 3.1 per cent.

Meta Platforms, the parent company of Facebook, Instagram and WhatsApp, was an outlier. It wavered between small gains and losses after unveiling its new app Threads, a rival to Twitter, which has had a bumpy ride under new owner Elon Musk.

Stock markets abroad also fell sharply.

China's market has been under particular pressure recently as the recovery for the world's second-largest economy sputters following the removal of anti-COVID restrictions. Tensions between China and the United States have also weighed on the market, and US Treasury Secretary Janet Yellen visited China Thursday attempting to improve relations.

Hong Kong's Hang Seng index dropped 3 per cent, partly due to heavy selling of Chinese banks shares after Goldman Sachs downgraded them, citing concerns about the slowing economy and lenders' exposures to debt. Stocks in Shanghai fell 0.5 per cent.

Japan's Nikkei 225 dropped 1.7 per cent after being one of the world's stars through the first half of the year.

In Europe, France's CAC 40 tumbled 3.1 per cent and Germany's DAX lost 2.6 per cent.