(Bloomberg) — U.S. stocks rebounded in choppy trading while Treasuries fell as investors assessed hiring data showing a spike in wages paid that could force the Federal Reserve to accelerate its timeline for rate hikes.
The S&P 500 and the tech-heavy Nasdaq 100 gained traction, reversing earlier losses. Data showed hiring in December came in at less than half of estimates. The unemployment rate fell to 3.9% and hourly wages surged 4.7% from a year ago, topping forecasts by half a percentage point. The two-year Treasury rate pushed to 0.89%, heading for the biggest weekly spike since October 2019. Crude oil headed for the longest streak of weekly gains since October on tightening supplies.
While the hiring total was softer than expected, prior monthly totals were revised higher and the drop in unemployment rate suggested the labor market remains on strong enough footing for the Fed to consider lifting rates as early as in March. Overnight index swaps are pricing in about an 88% chance of an interest rate hike that month, according to data compiled by Bloomberg.
“The wage number is the story here. The Fed simply cannot ignore that,” said Steve Chiavarone, portfolio manager and head of multi-asset solutions at Federated Hermes.
An overtly hawkish stance from the Fed has roiled financial markets at the start of a new year, with investors reassessing how to price assets in an environment of rising interest rates. The removal of crisis-era accommodation marks a shift not seen in at least three years, a time that also saw a spike in volatility.
“We knew coming into 2022 that the Fed was going to be a creator of volatility within the market and we’re seeing that right out of the gate at the start of the year,” Lindsey Bell, chief markets and money strategist at Ally, said by phone.
Overnight index swaps are pricing in about an 88% chance of an interest rate hike in March, according to data compiled by Bloomberg.
Comments by regional Fed presidents provided some additional insight Thursday as traders attempted to predict a possible schedule for tightening. St. Louis Fed President James Bullard, a more hawkish policy maker, said in a speech the central bank could raise its target interest rate as soon as March. Meanwhile, San Francisco Fed President Mary Daly said at a virtual event that trimming the Fed balance sheet would come after normalizing the Fed funds rate.
Europe’s equity benchmark traded lower Friday, on track to open the year with a down week. In addition to watching the Fed, the region’s investors are monitoring Covid-19 developments, with Germany poised to tighten restrictions on access to restaurants and cafes.
Consumer prices in the euro area jumped 5% from a year earlier in December, adding pressure on the ECB to join a growing legion of central banks from the Fed to the Bank of England in tightening monetary conditions. The euro advanced after the report, only to give up the gains later.
Oil was on course for a third weekly increase amid supply constraints. Gains in commodities and emerging-market stocks signaled some risk-taking had returned.
What to watch this week:
- Fed’s Daly discusses monetary policy on a panel Friday
- ECB’s Schnabel speaks on a panel Saturday
For more market analysis, read our MLIV blog.
Some of the main moves in markets:
Stocks
- The S&P 500 rose 0.1% as of 9:48 a.m. New York time
- The Nasdaq 100 rose 0.2%
- The Dow Jones Industrial Average was little changed
- The Stoxx Europe 600 fell 0.3%
- The MSCI World index rose 0.2%
Currencies
- The Bloomberg Dollar Spot Index fell 0.3%
- The euro rose 0.2% to $1.1325
- The British pound rose 0.2% to $1.3561
- The Japanese yen was little changed at 115.74 per dollar
Bonds
- The yield on 10-year Treasuries advanced four basis points to 1.76%
- Germany’s 10-year yield was little changed at -0.05%
- Britain’s 10-year yield was little changed at 1.16%
Commodities
- West Texas Intermediate crude fell 0.2% to $79.28 a barrel
- Gold futures rose 0.1% to $1,791.40 an ounce
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