Wall Street and the Treasury market ended the first week of 2007 with sharp losses Friday after a surprising surge in new jobs and wages diminished investors’ hopes for an interest rate cut.
NEW YORK (AP) — Wall Street and the Treasury market ended the first week of 2007 with sharp losses Friday after a surprising surge in new jobs and wages diminished investors’ hopes for an interest rate cut.
The markets shuddered at the Labor Department’s report that U.S. employers increased their payrolls by 167,000 in December and boosted workers’ hourly wages by 0.5 percent. The unemployment rate, meanwhile, held steady at a historically low 4.5 percent.
The report suggests the economy won’t be slowing as much as investors anticipated – news that should prove positive for stocks in the long-term, but which raised concerns Friday that the Federal Reserve might use it as a reason to raise interest rates. A rise in rates could crimp consumer spending, and further weaken the housing market by making mortgages pricier.
At this point, though, economists see policy makers keeping rates steady.
“Until we get an uptick in the unemployment rate, in this environment the Fed will probably stay in a holding pattern,” said Commonfund chief economist Michael Strauss, pointing to the slowing, but still expanding, economy. “Moderate economic growth is historically good for the equity market, not a bad thing,” he said.
Concerns about the jobs report added to disappointment over a warning by Motorola Inc. that the cell-phone maker is lowering its fourth-quarter sales estimates, as well as a series of analyst downgrades of technology companies.
According to preliminary calculations, the Dow Jones industrial average fell 82.68, or 0.66 percent, to 12,398.01 – the biggest one-day drop since Nov. 27. The Dow had sunk by more than 115 points in earlier trading Friday.
Broader stock indexes also fell. The Standard & Poor’s 500 index dipped 8.63, or 0.61 percent, to 1,409.72, and the technology-laden Nasdaq composite index dropped 19.18, or 0.78 percent, to 2,434.25.
Prices plummeted in the Treasury market, driving up the yield on the benchmark 10-year Treasury note to 4.65 from 4.61 percent late Thursday. The 10-year yield had touched 4.70 percent earlier Friday immediately following the jobs report.
Friday’s steep declines capped a week that showed the stock market’s indecision over whether it wants the economy to slow down or perk up. On Wednesday, the first trading day of 2007, stocks fell after the Fed released minutes expressing concern that the weak housing sector might be a drag on the economy. However, Friday’s positive jobs snapshot, suggesting a quickening economy, also caused stocks to drop.
The clash between worries over economic cooling and inflation is due largely to investors’ caution, given stocks’ big run-up in late 2006.
“It’s just a sign of volatility,” said Jeff Kleintop, chief investment strategist for PNC Wealth Management. “We just went through a rally that could’ve been drawn with a ruler.”
The Dow is down 0.52 percent on the week and year; the S&P is down 0.60 percent; and the Nasdaq is up 0.78 percent.
The Federal Reserve, which has kept rates stable since August after raising rates for two years, is expected to leave rates on hold again when it meets Jan. 30-31. Still, investors were nervous enough Friday to sell stocks and bonds, following a months-long pattern of cashing in recent gains at the first possible sign of a rate hike – which the Fed would enact if inflation accelerated.
“There are worries about inflation on signs of increasing wages, but you have to take that with a grain of salt,” Kleintop said. He noted that other wage measures, such as the employment cost index, have remained fairly tame; also, energy prices have been rapidly declining.
Crude oil prices rebounded 72 cents to settle at $56.31 a barrel on the New York Mercantile Exchange, but ended nearly 8 percent lower on the week on expectations of sluggish demand due to mild weather in the Northeast and Midwest United States.
The dollar rose against most major currencies, while gold prices slipped.
Motorola fell $1.63, or 7.9 percent, to $18.92 on the New York Stock Exchange, after the world’s second largest cell-phone maker slashed its earnings estimates.
Other technology stocks also fell on a spate of analyst downgrades. Intel Corp. fell 7 cents to $21.10; Silicon Laboratories dropped $1.98, or 5.6 percent, to $33.36; and Broadcom Corp. fell $1.12, or 3.3 percent, to $32.45.
Strong December sales figures from the nation’s two biggest consumer electronics retailers, Best Buy Co. and Circuit City Stores Inc., failed to give Wall Street a big enough boost to offset the jobs report and Motorola’s news.
Best Buy rose 16 cents to $50, while Circuit City slipped fell 71 cents, or 3.6 percent, to $19.29, pulling back on worries about competition from Best Buy.
Declining issues outnumbered advancers by about 3 to 1 on the New York Stock Exchange, where volume came to 1.22 billion shares.
The Russell 2000 index of smaller companies fell 14.08, or 1.78 percent, to 775.87.
Overseas, Japan’s Nikkei stock average closed down 1.51 percent. Britain’s FTSE 100 fell 1.06 percent, Germany’s DAX index fell 1.22 percent, and France’s CAC-40 fell 1.03 percent.