Market sell-off accelerates as traders raise odds for Fed rate hikes

By John Towfighi, CNN

New York (CNN) — Investors sold off stocks, bonds, bitcoin and gold Friday after a strong jobs report boosted odds the Federal Reserve might raise interest rates later this year to combat inflation and Wall Street wrestled with weakness in AI stocks.

The S&P 500 fell 1.8%, going into the red for the week and on pace to snap a nine-week winning streak. The tech-heavy Nasdaq Composite fell 3%, set for its worst day since October. The Dow fell 407 points, or 0.8%.

Volatility in the S&P 500 picked up this week as investors took profits from recent stock surges and digested shifts in expectations for Fed interest rates.

The economy added 172,000 jobs in May, beating expectations, according to data released Friday from the Bureau of Labor Statistics. The strong job gains come after recent data showed inflation was heating up because of the oil spike from the war with Iran.

That could shift the Fed’s focus to reining in inflation, raising the odds of an interest-rate hike later this year. Traders expect a 43% chance the Fed hikes rates in December, up from 26% a month ago, according to CME FedWatch.

“In the near term the data confirms that Fed easing is off the table this year, and markets continue to worry that the next move could be a hike,” James McCann, senior economist for investment strategy at Edward Jones, said in a note.

Treasury yields, which rise when bond prices fall, jumped higher. The 10-year yield, which influences the mortgage rates, rose to 4.54%. Higher Treasury yields can put pressure on stocks.

After a nine-day winning streak, the Nasdaq fell for the third day in a row, pressured by a sell-off in semiconductor chip stocks. After an enormous rally in recent weeks, AI-related stocks pulled back: A popular exchange-traded fund tracking memory chip stocks sank 12%.

In another sign of the risk-off mood, bitcoin tumbled more than 3% and traded just above $61,000, hovering near its lowest level since October 2024. The cryptocurrency dropped more than 17% this week after key industry company Strategy disclosed it sold some bitcoin for the first time since 2022. Bitcoin is down more than 50% since hitting a record high in October.

Gold prices also dropped more than 3%. Higher interest rates can make assets like gold that don’t pay income less appealing.

McCann at Edward Jones said the bar for rate hikes remains high, and there would need to be signs of a “more persistent spike in inflation” for the Fed to move towards a tightening cycle.

“However, new Fed Chair (Kevin) Warsh will face a challenging balancing act at his first meeting given the complicated balancing act facing Fed policy at present and well document divisions on the FOMC rate-setting committee,” McCann added.

CNN’s Fear and Greed Index, a proxy for market sentiment, hovered in “neutral,” dipping out of “greed” earlier this week. The F&G Index had been in “greed” since April 15, when the S&P 500 hit its first record high during the war with Iran.

Oil prices were lower Friday: Brent crude futures fell 2.3% to $92.90 per barrel. US crude futures fell 3.4% to just below $90 per barrel.

Treasury yields have traded in lock-step with oil prices in recent weeks, rising on nerves about inflation when oil rises – and then falling when oil falls. But that shifted Friday.

Treasury yields jumped higher despite the fall in oil prices, signaling that traders are focusing on the strong jobs data and how the labor market might be stabilizing, which could heighten focus on inflation.

“Markets have spent months searching for a reason for the Federal Reserve to cut rates. Today’s jobs report gave policymakers a reason not to do so,” Nigel Green, CEO at DeVere Group, said in a note.

“One report does not make policy, but a report of this magnitude changes probabilities,” Green said. “And markets have recognized that immediately.”

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