[New York Stock Market] Mixed Close After Strong Employment Eases Fed Tightening Expectations...

[Image source=Reuters Yonhap News]

[Asia Economy New York=Special Correspondent Joselgina] Major indices on the U.S. New York stock market closed mixed near the flat line on the last trading day of the week, the 2nd (local time). The labor market was confirmed to remain strong, leading to a slight retreat in expectations for Federal Reserve (Fed) tightening. In particular, there is a flood of analysis suggesting that the Fed may take a more hawkish stance than expected due to high wage growth acting as inflationary pressure.

On this day at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average closed at 34.87 points (0.10%) higher than the previous session at 34,429.88. Meanwhile, the large-cap focused S&P 500 index fell 4.87 points (0.12%) to 4,071.70, and the tech-heavy Nasdaq index dropped 20.95 points (0.18%) to 11,461.50.

The three major indices, which showed weakness throughout the day, reduced their losses just before the close and ended trading near the flat line. However, on a weekly basis, all three indices posted gains. Following the Fed’s recent signal of a slowdown in pace, the Nasdaq, sensitive to interest rates, showed the most notable weekly gain of 2.1%.

By sector, among the 11 sectors of the S&P 500, five sectors including materials, industrials, and health care closed higher. The remaining six sectors, including technology and real estate, declined. Cloud security company Zscaler slid 10.73% despite strong earnings. Marvell Technology closed down 1.50% after lowering its future guidance due to earnings below expectations. Food delivery service DoorDash dropped more than 3% after RBC Capital Markets downgraded its rating over concerns about slowing growth and intensified competition.

Investors closely watched the November employment report released that day, seeking hints for the Fed’s December rate decision. According to the U.S. Department of Labor, nonfarm payrolls increased by 263,000 last month, far exceeding the expert forecast of 200,000. The unemployment rate remained unchanged at 3.7%, near a 50-year low. With the labor market showing stronger-than-expected strength, the market widely anticipated that the Fed would take a more hawkish approach and maintain higher interest rates for longer.

In particular, the market was cautious about rising wage growth. Average hourly earnings surged 0.6% from the previous month, marking the largest increase since January. This was double the market expectation. Compared to the same month last year, wages rose 5.1%, surpassing the 4.9% increase in October.

Peter Boockvar, Chief Investment Officer (CIO) of Bleakley Financial Group, said, "What surprised both bond and stock markets was the unexpected wage increase," adding, "Today’s strong data aligns with Fed Chair Jerome Powell’s concerns about prolonged inflation emphasized last Wednesday." Bank of America (BoA) economists stated, "This indicates the Fed has more work to do and that labor market mismatches could worsen," forecasting the terminal rate to rise to 5-5.25%.

If the mismatch between labor demand and supply worsens, companies facing labor shortages will have no choice but to raise wages to secure workers. This, in turn, acts as a factor fueling inflation again. This is also why Chair Powell, while signaling a slowdown in pace during his Brookings Institution speech, pointed out that "the labor market must calm down first." At this event, Powell also lamented that controlling inflation is difficult due to recent high wage growth.

Following the employment report release, investors in the federal funds futures market saw a more than 36% chance of a 5-5.25% rate in March next year. While there was no significant change in the possibility of a big step (0.5 percentage point hike) in December, bets increased that rates will be maintained at a higher level for longer than expected.

However, some caution remains. Anna Han, Vice President at Wells Fargo Securities, said, "One strong labor indicator after Chair Powell’s speech is not enough," adding, "(The Fed) is watching inflation trends. This will calm the market and ease pressure."

In the New York bond market, government bond yields initially rose but then fell again. The 10-year Treasury yield closed at 3.502%, down from 3.525% the previous day. The 2-year yield, sensitive to monetary policy, ended at 4.287%, up from 4.254%. The U.S. dollar showed slight weakness. The Dollar Index, which measures the dollar’s value against six major currencies, moved down 0.2% to around 104.5.

International oil prices fell slightly ahead of the oil-producing countries’ meeting on the 4th. On the New York Mercantile Exchange, January West Texas Intermediate (WTI) crude oil prices closed at $79.98 per barrel, down $1.24 (1.53%) from the previous session. However, due to factors such as China’s easing of COVID-19 lockdowns and a weaker dollar throughout the week, the weekly gain reached 4.85%.

The European Union (EU) agreed on a price cap of $60 per barrel ahead of the implementation of the Russian oil price cap. This is about $10 below the current trading price of around $70 per barrel for Russian Urals crude oil. Accordingly, the 27 EU member states will, starting from the 5th, work with international partners to force Russia to sell oil to countries at $60 per barrel or less. For Russian oil exports exceeding the cap, maritime services such as insurance and transportation will be prohibited.