US equity indexes experienced a notable decline this week, primarily driven by a substantial drop on Friday. This occurred shortly after the release of surprisingly positive nonfarm payroll data, which instigated a significant rally in government bond yields. As a result, market expectations regarding the duration of higher interest rates have increased significantly.
The S&P 500 concluded the week at 5,827.04, down from 5,942.52 the previous week. Similarly, the Nasdaq Composite dropped to 19,161.63 from 19,621.68. The Dow Jones Industrial Average saw a decrease as well, ending the week at 41,938.45, compared to 42,732.13 the prior week. On Friday, US Treasury yields surged dramatically.
The 10-year yield rose by 8.2 basis points to reach 4.76%, having hit a 52-week high of 4.79% during the trading session. The two-year yield also experienced a significant increase, climbing 11.7 basis points to 4.38%. Both yields are expected to finalize the week on an upward trend. Notably, sectors that are sensitive to interest rates, including real estate and financials, recorded the most substantial declines as the strong jobs report validated the recent escalations in Treasury yields.
In contrast, the energy sector emerged on top of the performance charts. The nonfarm payroll figures indicated an increase of 256,000, surpassing the projected increase of 165,000 per a survey compiled by Bloomberg, and representing a rise from the previous month’s gain of 212,000. Furthermore, the unemployment rate showed improvement, dropping by 10 basis points to 4.1%, which was unexpected as forecasts suggested it would remain stable.
Hourly earnings rose by 0.3% as anticipated, following a 0.4% increment in November, with year-over-year earnings up by 3.9%, slightly lagging behind November’s 4% pace. TD Economics provided insights on the labor market, stating, "There were virtually no signs of underlying weakness in the labor market." The research firm predicts that the Federal Reserve will maintain its current interest rates this month; however, they emphasize that the next few months' data will be crucial in making a conclusive decision for March.
The probability of the Federal Reserve maintaining its position during all upcoming rate-setting meetings until December surged on Friday, as indicated by the CME Group's FedWatch Tool. The likelihood of an unchanged target rate come March skyrocketed to 74% from the previous 56%. Notably, major tech stocks such as Apple, Nvidia, and Netflix were among the most significant decliners within the mega-cap category this week.
The underperformance of these entities in an otherwise fluctuating market raises questions about the resilience of tech stocks given the broader economic conditions..