Interest Rate Worries Lead To Sell-Off On Wall Street - U.S. Commentary

(RTTNews) - With traders reacting negatively to the Labor Department's monthly jobs report, stocks moved sharply lower over the course of the trading day on Friday. The significant pullback on the day more than offset the modest gains posted in the previous session.

The major averages climbed off their worst levels going into the close but remained firmly in the red. The Dow tumbled 278.94 points or 1.5 percent to 17,856.78, the Nasdaq slumped 55.44 points or 1.1 percent to 4,927.37 and the S&P 500 plunged 29.78 points or 1.4 percent to 2,071.26.

For the week, the Nasdaq fell by 0.7 percent, while the Dow and the S&P 500 dropped by 1.5 percent and 1.6 percent, respectively.

The weakness on Wall Street came following the release of a Labor Department report showing that stronger than expected job growth pushed the unemployment rate down to a six-year low in February.

While the data paints an upbeat picture regarding the labor market, the report also added to speculation about the Federal Reserve raising interest rates in the near future.

The Fed is not expected to raise rates at its next monetary policy meeting later this month, although its accompanying statement may signal that a rate hike is on the horizon. The Labor Department said non-farm payroll employment jumped by 295,000 jobs in February, while economists had expected an increase of about 230,000 jobs.

The unemployment rate subsequently fell to 5.5 percent in February from 5.7 percent in January, coming in below economist estimates for a rate of 5.6 percent.

With the bigger than expected decrease, the unemployment rate dropped to its lowest level since hitting 5.4 percent in May of 2008.

Paul Dales, Senior U.S. Economist at Capital Economics, said the drop by the unemployment rate leaves it at the top end of the Federal Reserve's 5.2 to 5.5 percent estimate of the natural rate.

"In theory, when the unemployment rate is at the natural rate, interest rates should be at the neutral rate of between 3% and 4%," Dales said. "As such, this is quite a symbolic change that increases the pressure on the Fed to hike rates in June."

The jobs report largely overshadowed a separate report from the Commerce Department showing that the U.S. trade deficit narrowed in line with economist estimates in the month of January.

Sector News

Gold stocks turned in some of the market's worst performances on the day, dragging the NYSE Arca Gold Bugs Index down by 7.5 percent. With the drop, the index fell to its lowest closing level in over two months.

The weakness among gold stocks came amid a steep drop by the price of the precious metal, with gold for April delivery tumbling $31.90 to $1,164.30 an ounce.

Reflecting the concerns about higher interest rates, commercial real estate and utilities stocks also saw significant weakness, with the Morgan Stanley REIT Index and the Dow Jones Utilities Average plunging by 3.3 percent and 3.1 percent, respectively.

Considerable weakness was also visible among oil service stocks, as reflected by the 2.4 percent loss posted by the Philadelphia Oil Service Index. A notable decrease by the price of crude oil contributed to the weakness in the sector.

Electronic storage, housing, and steel stocks also came under notable selling pressure, moving lower along with most of the other major sectors.

Other Markets

In overseas trading, stock markets across the Asia-Pacific region turned in another mixed performance during trading on Friday. Japan's Nikkei 225 Index surged up by 1.2 percent, while Hong Kong's Hang Seng Index edged down by 0.1 percent.

The major European markets also ended the day mixed. While the U.K.'s FTSE 100 Index fell by 0.7 percent, the French CAC 40 Index closed just above the unchanged line and the German DAX Index rose by 0.4 percent.

In the bond market, treasuries pulled back sharply on the heels of the upbeat jobs data. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, surged up by 12.8 basis points to a two-month closing high of 2.24 percent.

Looking Ahead

Following the slew of U.S. economic data released over the past week, the economic calendar for next week is relatively quiet.

Nonetheless, traders are likely to keep a close eye on reports on retail sales, wholesale price inflation, and weekly jobless claims.