Shares fell on Friday, after a wild week that saw the market rally and then collapsed in quick succession, as investors focused on the bad news in the latest update on the US job market.
After falling more than 1 percent in early trading, the S&P 500 took back some terrain and fell around half a percent. The index had fallen 3.6 percent on Thursday after rising 3 percent on Wednesday, and is now on track for its fifth weekly fall in a row.
Wall Street’s concern this year has been how quickly the Federal Reserve will withdraw its support for the economy, by raising interest rates and shrinking bond holdings. The measures make risky investments less attractive, and end years of low interest rates and policies intended to keep the cash flow through the financial system, both of which contributed to a massive rise in equities.
On Friday, the Ministry of Labor reported that employers added 428,000 jobs in April, while average hourly earnings rose 5.5 percent from a year ago. While the report showed that employment is still robust, economists have said that the strong labor market and wage acceleration may motivate the central bank to raise interest rates more aggressively.
A particular concern is that rising wages could lead to inflation, as companies pass on higher employment costs to customers. This in turn can cause workers to demand even higher wages, triggering an upward spiral.
On Wednesday, the central bank raised interest rates by half a percentage point, the largest increase since 2000. In a statement following the announcement, Fed Chairman Jerome H. Powell cited the labor market, and especially the record number of vacancies in relation to the number of unemployed workers, as a reason for decision-makers more aggressive in recent months.
“You can see that the labor market is out of balance; you can see that there is a shortage of labor, ”said Mr. Powell. In April, he described the labor market as “unbearably hot”.
The Fed is trying to curb demand by making money more expensive to borrow, but investors fear the Fed will push the economy into a recession when it does.
“The job data from April underscores Powell’s view that the labor market is unusually tight and risks an upward wage price spiral,” Kathy Bostjancic, a US financial economist at Oxford Economics, wrote in a note after the report.
The reaction to the job report was also clear in the bond market. The yield on 10-year government bonds, a proxy for the investor’s expectations of interest rates, rose to 3.1 per cent from 3 per cent a day earlier.