Stocks Are Slipping After Solid Jobs Report

The U.S. added 372,000 jobs for the month of June, higher than economists’ estimates of 250,000 and just below May’s revised result of 384,000. Wages gained 5.1% year over year, slower than the 5.3% gain seen in May. 

Overall, the job market looks stronger than expected. To be sure, the April and May results were revised lower by a total of 74,000. “On net, those revisions make the headline beat for June less notable, but the overall takeaway remains that the labor market remains reasonably strong despite,” wrote Jason Pride, chief investment officer of Private Wealth at Glenmede. 

The solid report means the Federal Reserve’s interest rate hikes may not slow down as soon as markets had hoped. The Fed has made clear that its main priority is to lower inflation, and price increases may stick around for longer if the labor market is healthy. 

Markets, therefore, are reflecting slightly increased Fed hawkishness, or willingness to aggressively lift rates. 

The 2-year Treasury yield, which attempts to forecast the level of the fed funds rate a couple of years from the present, has gained to 3.11% from around 3% just before the jobs report, as investors sell the bond.

The 10-year yield rose to 3.09% from just under 3% before the report. 

“Today’s number will reinforce the aggressive stance they’ve [the Fed] decided to take and why Treasury yields are rising both on the short end and longer end,” wrote Peter Boockvar, chief investment officer at Bleakley Advisory Group. 

Importantly, the 10-year yield still isn’t gaining much, and it’s lower than the 2-year yield. That “inverted yield curve” means that markets see the Fed’s plan to rapidly hike rates as potentially damaging to inflation and economic growth for the longer term. 

That view threatens to kill a recent stock market rally. The S&P 500 had risen 7% from its June intraday low through Thursday’s close as markets were hoping that the Fed was getting closer to the end of its aggressive rate hiking path.

At its July meeting, the Fed has been expected to lift the benchmark lending rate by either half or three-quarters of a percentage point. That aggressiveness could stick around for a bit longer than previously expected—and Friday’s jobs number solidifies the expectation of a three-quarter point hike, wrote Charlie Ripley, senior investment strategist at Allianz Investment Management. 

But the next test for Fed policy expectations will be July 13, when the consumer price index is released. Economists expect a second consecutive inflation reading of above 8%.

That all may feel scary for the moment, but one of the reasons the stock market isn’t falling that hard is because financial markets have reflected much of the hawkishness already.

It’s entirely plausible that, while stock and bond prices could keep falling from here, the declines would get smaller. The stock market drop Friday wasn’t as ugly as other ones this year, when the indexes fell more than 2% on hawkish Fed bets. And rates are up, but they aren’t surging to their recent highs.

“The bigger sell-offs in [bond] yields are probably behind us,” said Marvin Loh, senior global macro strategist for State Street.

Investors hope the same is true going forward for stocks.

Overseas, London’s

FTSE 100
rose 0.1%. Tokyo’s

Nikkei 225
gave up significant intraday gains to end 0.1% higher, as Japan reeled from reports that former Prime Minister Shinzo Abe was shot and killed while giving a speech.

Here are some stocks on the move Friday:

Twitter

(ticker: TWTR) lost 4.4%.

Tesla

CEO Elon Musk’s acquisition of the social-media company may be in jeopardy as a result of a conflict over reliable spam figures, the Washington Post reported, citing anonymous sources.

After rallying 15% in the previous session following the announcement of its four-for-one stock split, shares in

GameStop

(GME) dropped 4.4%. News broke late Thursday that the videogame retailer’s chief financial officer would be departing the company amid plans for corporate job cuts.

Upstart Holdings

 (UPST) sank 20% after the artificial-intelligence lending company cut its second-quarter revenue guidance.

PayPal Holdings

 (PYPL) was down 1.9% after an analyst at Redburn downgraded the stock to Neutral from Buy.

Spirit Airlines

 (SAVE) stock was 4.5% higher after the company said in a statement late Thursday that it delayed for the third time a shareholder vote on a merger with 

Frontier Group Holdings

 (ULCC) so the discount carrier can continue discussions with both Frontier and 

JetBlue Airways

 (JBLU). Frontier was up 3.9% Friday, while JetBlue slipped 1.5%.

Costco Wholesale

 (COST) was higher by 1.2% after the company released its June sales data, which continued to rise thanks to elevated gas prices.

(Angela Palumbo contributed to this report.)

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com and Jack Denton at jack.denton@dowjones.com