By Chuck Mikolajczak
NEW YORK (Reuters) - A gauge of global stocks dropped more than 1%, while U.S. Treasury yields and the dollar rose on Friday after a shockingly strong U.S. jobs report renewed concerns the Federal Reserve may remain aggressive in its path of interest rate hikes as it tries to tame inflation.
The report from the Labor Department showed nonfarm payrolls surged by 517,000 jobs in January, well above the 185,000 estimate of economists polled by Reuters, with data for December also being revised higher. Average hourly earnings increased 0.3%, as expected, down from the 0.4% in the prior month, while the unemployment rate of 3.4% was the lowest since 1969.
Equities have rallied to start the year on expectations the Fed may be forced to pause or even pivot from its rate hikes in the back half of the year, growing more confident after comments from Fed Chair Powell on Wednesday that acknowledged the "disinflationary" process may have begun. Additional fuel was added after policy announcements by the European Central Bank (ECB) and Bank of England (BoE) on Thursday.
"While it is very helpful to see the jobs increasing, it is really a horse race between that ongoing income and how quickly inflation comes down," said Lisa Erickson, head of public markets group at U.S. Bank Wealth Management in Minneapolis, Minnesota.
"The Fed really is in a tough place trying to navigate between keeping those price pressures down and not causing too much economic pain."
Interest rate futures now indicate the Fed is likely to deliver at least two more rate hikes, taking the benchmark rate to above 5%.
U.S. stocks closed lower, with additional downward pressure being supplied by a 2.75% decline in Google parent Alphabet and an 8.43% drop in Amazon after their quarterly results.
Apple, however, helped prevent further declines, as the stock erased losses in premarket trading to close 2.44% higher following its quarterly earnings.
Earnings are now expected to decline 2.7% for the quarter from the year-ago period, according to Refinitiv data, down from the 1.6% fall expected at the start of the year.
Other data showed the U.S. services industry rebounded strongly in January, according to the Institute for Supply Management (ISM).
The Dow Jones Industrial Average fell 127.93 points, or 0.38%, to 33,926.01; the S&P 500 lost 43.28 points, or 1.04%, to 4,136.48; and the Nasdaq Composite dropped 193.86 points, or 1.59%, to 12,006.96.
Even with Friday's declines, both the S&P 500 and Nasdaq notched weekly gains, with the Nasdaq securing a fifth straight week of gains, its longest since October-November 2021.
European stocks closed modestly higher, erasing earlier declines on optimism over the region's economy. The pan-European STOXX 600 index rose 0.34%, but MSCI's gauge of stocks across the globe shed 1.08%. The STOXX index closed with a 1.23% gain on the week, its highest closing level since April 21. MSCI's index was on track for a second straight weekly advance even with Friday's tumble.
U.S. Treasury yields climbed after the payrolls report, with those on the benchmark 10-year note up 13 basis points to 3.528%, from 3.398% late on Thursday, poised for their biggest one-day jump since Oct. 19.
The greenback strengthened in the wake of the data, climbing off a nine-month on Thursday to hit 103.01, its highest since Jan. 12, as the dollar index rose 1.149% and the euro was down 1.02% to $1.0799.
The Japanese yen weakened 1.90% to 131.18 per dollar, while Sterling was last trading at $1.2053, down 1.39% on the day.
Crude prices turned lower in part due to strength in the dollar and concerns about higher interest rates, with Brent and WTI both dropping nearly 8% on the week.
U.S. crude settled down 3.28% at $73.39 per barrel and Brent settled at $79.94, down 2.71% on the day.
(Reporting by Chuck Mikolajczak; additional reporting by Herbert Lash; Editing by Kirsten Donovan and Jonathan Oatis)