Wall Street ended lower on Friday amid concerns about rising Treasury yields and the prospect of more Fed rate hikes.
The Dow Jones Industrial Average dropped 99 points on Friday, or 0.3 percent, to end its sixth straight week in the red. The S&P 500 fell 0.6 percent and the Nasdaq lost 1.4 percent.
It followed the Dow’s worst day since the 2020 pandemic crash on Thursday, as investor sentiment cratered in the face of concerns that the Fed’s interest rate hike would not be enough to tame soaring inflation.
‘Ninety-five percent of the driver of the market right now is long-term interest rates,’ said Jay Hatfield, founder and chief executive of Infrastructure Capital Management in New York.
The latest jobs report on Friday morning only heightened those concerns, showing that nonfarm payrolls increased by 428,000 jobs last month, well above the 391,000 expected by economists polled by Reuters.
A trader works on the trading floor at the New York Stock Exchange in Manhattan. Wall Street’s main indexes opened lower on Friday as new jobs data fueled inflation concerns
The Dow dropped again following its worst day since the 2020 pandemic crash on Thursday
Though the strong employment gains speak to the economy’s underlying strength, fears are mounting that a labor shortage will combine with high inflation to create a ‘wage-price spiral’ and send consumer prices out of control.
Friday’s data show that the unemployment rate remained unchanged at 3.6 percent in April, while average hourly earnings increased 0.3 percent against forecast of a 0.4 percent rise.
Concerningly, the labor force participation rate, which measures the percentage of working-age Americans either working or seeking work, remained unchanged at 62.2 percent, a level that prior to the pandemic was last seen in the 1970s.
The Fed is counting on more Americans to re-join the workforce to tame rising wages, a shift that is so far slow to develop.
While rising wages are usually a boon to workers, they can be a double-edged sword if they force companies to make swift price increases for the goods and services they sell.
And indeed, the average wage gains seen by American workers in the past year have been more than erased by the high inflation rate, leaving them worse off than they were before.
The US unemployment rate remains near 50-year lows at 3.6%, April’s jobs report showed
The latest jobs report on Friday morning heightened inflation concerns, showing that nonfarm payrolls increased by 428,000 jobs last month, well above expectations
On Wall Street Friday, speculative growth sectors such as biotech and solar energy were hit hardest.
Illumina dropped more than 11 percent, while Enphase Energy fell nearly 5 percent.
Under Armour plunged 24 percent after the sportswear maker forecast downbeat full-year profit, as it grapples with higher transportation costs and a hit to its business from renewed COVID-19 curbs in China.
Shares of rival Nike also slipped, dropping 5.6 percent.
DoorDash shares sank as much as 5 percent, even after the food delivery firm raised its full-year forecast for core growth target and reported upbeat quarterly revenue.
With all signs pointing toward an ultra-tight labor market, concerns have mounted that the country could enter a so-called ‘wage-price’ spiral.
The wage-price spiral, which was partly responsible for double-digit inflation in the 1970s, occurs when workers expect prices to increase rapidly, and demand higher wages to compensate.
Employers, forced to pay higher wages, raise their prices to compensate, creating a self-reinforcing cycle that is difficult to break.
The consumer price index hit 8.5 percent in March from a year ago, and new inflation data from April is due out next week
Investors fear that Fed Chair Jerome Powell’s gradual rate hike path may not be enough to tame soaring inflation, after several new warnings signs flashed on inflation
At Wednesday’s press conference, Fed Chair Jerome Powell tried to downplay fears of a wage-price spiral, saying that higher wages would attract more workers into the job market and ease the labor shortage.
‘We like to think that supply and demand will come back into balance and that, therefore, wage inflation will moderate to still high levels of wage increases, but ones that are more consistent with 2 percent inflation. That’s our expectation,’ said Powell.
‘We don’t see a wage-price spiral,’ he added. ‘We can’t allow a wage-price spiral to happen, and we can’t allow inflation expectations to become unanchored. It’s just something that we can’t allow to happen.’
The Fed took action against inflation by raising rates this week, but some analysts fear the central bank has moved to slowly to fight rising prices, which Powell long insisted were ‘transitory’.
At the end of its May meeting on Wednesday, the Fed raised benchmark interest rates by half of a percentage point, taking the target rate to 0.75 percent to 1 percent, in its biggest single rate increase since May 2000.
The central bank said it will also begin the process of reducing its $9 trillion balance sheet, which ballooned during the pandemic as the Fed gobbled up bonds to pump money into the economy.
Reducing the Fed’s balance sheet holdings will have the effect of further raising loan costs throughout the economy, as will the higher benchmark rate.