Summary

The Dow and S&P 500 eased on Friday as increasing expectations the Federal Reserve could raise rates as soon as September offset optimism over a recovery in the U.S. labor market. Stronger-than-expected jobs data for May and a pickup in wages were the latest signs of better momentum in the economy.

Wall Street’s top banks said they expect the Fed to begin raising interest rates in September, followed by another increase before the end of the year, according to a Reuters poll.

The S&P utilities index, which includes top dividend payers that tend to fall as prospects for higher rates rise, was down 1.3 percent and among the weakest-performing sectors. The domestic benchmark bond yield hit its highest since October.

The S&P financials sector, which benefit from higher rates, was up 0.6 percent, and was among the day’s best performing sectors, while the S&P energy index added 0.7 percent. Energy shares bounced with oil prices.

For the week, the S&P 500 fell 0.7 percent, its second straight week of losses, the Dow was down 0.9 percent and the Nasdaq was down 0.03 percent.

The Fed has kept overnight rates near zero since December 2008 because the economic recovery has been slow. Cheap credit, however, has helped bolster the U.S. stock market.

New York Fed President William Dudley said he was concerned the economy may not be growing fast enough to absorb the slack among workers sidelined by the financial crisis. Still, Dudley said he expects the Fed would be in a position to raise rates later this year.

Sending the Nasdaq higher were the shares of Regeneron Pharmaceuticals, which rose 4 percent to $539.40 after a preliminary FDA review of an experimental drug it makes with Sanofi.

Among decliners on Friday were gold miners, which dropped along with gold prices. Shares of Newmont Mining were down 3.3 percent at $25.91.

Zumiez (ZUMZ.O) dropped 19.3 percent to $24 as it estimated current-quarter profit and revenue below analysts’ expectations.

Approximately 6.2 billion shares changed hands on the major equity  exchanges, slightly below the 6.3 billion daily average for the last five sessions, according to BATS Global Markets.

Job Growth Up Sharply

Job growth accelerated sharply in May and wages picked up, signs of strong momentum in the economy that bolster prospects for a Federal Reserve interest rate hike in September. Nonfarm payrolls increased 280,000 last month, the largest gain since December, the Labor Department said on Friday.

While the unemployment rate rose to 5.5 percent from a near seven-year low of 5.4 percent in April, that was because more people, including new college graduates, entered the labor force, indicating confidence in the jobs market.

The report joined May automobile sales and manufacturing data in suggesting economic activity was gaining traction after a slow start in the second quarter.

Doubts had sprung up in financial markets over whether the Fed would be able to raise rates this year after a first-quarter contraction in GDP and a string of weak data in April, including soft figures on consumer spending and industrial production.

The jobs data helped dispel those doubts. The dollar raced to a 13-year peak versus the yen and surged against the euro. Prices for U.S. government debt fell sharply, with the yield on the two-year note rising to a more than four-year high.

Average hourly earnings, which had long been the missing piece in the jobs recovery and one closely watched by Fed policymakers, rose eights cents. In addition, payrolls for March and April were revised to show 32,000 more jobs created than previously reported, giving the report a healthy glow.

Economists had forecast payrolls rising 225,000 last month, with the unemployment rate steady. May’s payroll gains lifted job growth above last year’s average of 260,000 jobs per month.

Despite May’s rise in the jobless rate, it remains not too far from the 5.0-5.2 percent range that most Fed officials consider consistent with full employment. Policymakers will also be encouraged by the return of some discouraged job seekers to the labor market.

The labor force participation rate, or the share of working-age Americans who are employed or at least looking for a job, increased 0.1 percentage point to 62.9 percent, a four-month high. The number of discouraged workers in May was the lowest since October 2008, and the percentage of the working-age population employed hit its highest level since June 2009.

In May, 28.6 percent of the unemployed had been out of work for 27 weeks or more, the lowest rate in six years. A broad measure of joblessness that includes people who want to work but have given up searching and those working part-time because they cannot find full-time employment was unchanged at 10.8 percent.

Further gains are expected given firming demand for entry-level workers and a better composition of jobs that are being created. In addition, many states have raised the minimum wage and some corporations are increasing pay for workers.

Walmart (WMT.N), the largest private employer in the United States, this week announced it would raise minimum wages for more than 100,000 U.S. workers, its second wage hike this year.

Payroll gains last month were broad-based, though the mining sector purged jobs again as it continued to work through the thousands of cuts announced by oil-field companies. The 18,000 mining jobs lost in May marked a fifth straight monthly decline.

Among sector heavyweights, Schlumberger (SLB.N) has announced about 20,000 layoffs this year, while Baker Hughes (BHI.N) and Halliburton (HAL.N) are also cutting thousands of jobs.

Manufacturing employment increased 7,000, while construction employment payrolls rose by 17,000.


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