Updated Nov. 6, 2015 4:09 p.m. ET
Investors geared up for the possibility that the Federal Reserve will raise interest rates next month following a stronger-than-expected jobs report.
Broad stock-market indexes were little changed Friday, but underlying sectors swung sharply as investors moved money out of income-yielding companies that do well during periods of low interest rates and into banks, whose profits are expected to increase as rates rise.
Meanwhile, the prices of U.S. government debt fell, sending the yield on the two-year note to the highest level in more than five years, and the U.S. dollar surged against its peers.
“We’re seeing a lot of volatility on a sector-by-sector basis, even if we’re not seeing any kind of wholesale broader market change,” said Joe Spinelli, who heads trading in single stocks for the Americas at Deutsche Bank,
noting that one of the big rotation trades on Friday was investors taking money out of companies that provide yields, such as utilities and real-estate-investment trusts, and putting it into those that are expected to benefit from higher rates, such as financial companies.
The Dow Jones Industrial Average added 47 points, or 0.3%, to 17910, capping a week of gains that pushed the blue-chip index back into positive territory for the year.
On Friday, the S&P 500 edged down fractionally while the Nasdaq Composite rose 0.4%. All three indexes notched weekly gains for the sixth week in a row.
Shares of utilities companies in the S&P 500 tumbled 3.6% Friday, with shares of Consolidated Edison
off 5.2%. Investors have poured money into utilities stocks in search for steady income as interest rates have languished at near-zero levels. As the first rate increase in nearly a decade looms, investors expect demand for these bond proxies to wane.
At the same time, shares of bank stocks jumped, as higher interest rates can allow banks to earn more income from lending. J.P. Morgan Chase
& Co. and Goldman Sachs Group added about 61 points to the Dow industrials, and financial stocks in the S&P 500 jumped 1.1%.
On Friday the Labor Department said U.S. employers hired at their strongest pace this year in October, a sign of sturdy economic growth that is likely to reassure Federal Reserve officials as they weigh raising short-term interest rates.
Nonfarm payrolls rose a seasonally adjusted 271,000 in October, while economists surveyed by The Wall Street Journal had predicted payrolls would rise by 183,000.
Low interest rates have been viewed as a key reason stocks have continued to climb since the financial crisis. At the same time, investors say a healthier economy should help lift corporate profits and provide support for stocks even if interest rates do go up.
“I would say the market is responding the right way,” said Tom Porcelli, chief U.S. economist at RBC Capital Markets. “The odds [for a rate hike] were already high before the report. This is sort of icing on the cake.”
Fed Chairwoman Janet Yellen said earlier this week that December would be a “live possibility” for an interest rate rise if the U.S. economy remains on track.
Fed funds futures, used by investors and traders to place bets on central-bank policy, showed Friday that they see a 70% likelihood of a rate increase from the Fed at its Dec. 15-16 policy meeting, according to data from CME Group.
The probability was 58% ahead of the jobs report. It was 38% before the Fed’s interest-rate statement last month.
“If you’re investing rather than trading, this is good news,” said Charlie Dreifus, portfolio manager with Royce & Associates LLC. “What it says is the economy is improving. More people working, making more money, cannot in any way be viewed as anything negative.” The consumer discretionary area is an obvious beneficiary, he said, as the economy gets better.
The dollar surged. In late New York trading, the euro fell 1.3% to $1.0742, its lowest since April, and the dollar was up 1.2% at ¥123.16, its strongest since August.
In late-afternoon trading, the yield on the benchmark 10-year Treasury note was 2.332%, compared with 2.245% Thursday. It marks the yield’s highest closing level since July 21. Yields rise as bond prices fall.
The yield on the two-year note, highly sensitive to changes in the Fed’s interest-rate policy outlook, was 0.889%, the highest closing level since May 2010. The yield was 0.841% Thursday.
In commodities, U.S.-traded crude oil fell 2% to $44.29 a barrel. Dollar-denominated commodities that trade internationally, including oil, tend to fall in price to offset a rising dollar.
Gold prices fell 1.5% to $1,087.60 a troy ounce on the Comex division of the New York Mercantile Exchange.
The Stoxx Europe 600 rose 0.3%. The U.K.’s FTSE 100 fell 0.2% and Germany’s DAX gained 0.9%.
In Asian trade, Japan’s Nikkei Stock Average rose 0.8% to its highest close since Aug. 21. The Shanghai Composite Index gained 1.9%, capping a strong week for the index. China’s stocks have gained more than 20% since their low for the year in August.
—Min Zeng and Leslie Josephs contributed to this article.
Write to Corrie Driebusch at [email protected]
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