Financial stocks led Wall Street lower in early afternoon trading on Friday after shockingly weak nonfarm payrolls data for May raised doubts if the economy could withstand an interest rate hike in the near term. The US Labour Department said payrolls increased by only 38,000 last month, the smallest gain since September 2010 and well below economists' forecasts of 164,000. The jobless rate fell to 4.7 percent, the lowest since November 2007.
"This was not a huge miss or off-the-mark, this was a shocking miss," said Mark Grant, managing director and fixed-income strategist at Hilltop Securities, Fort Lauderdale. "This will change the Fed's viewpoint dramatically, in my opinion." Traders slashed the odds of the Federal Reserve raising rates in June to 4 percent after the data from 20 percent previously, according to CME Group's FedWatch program. The probability of a July rate hike was reduced to 34 percent from 49 percent. "I think this (payrolls data) puts into serious question if the Fed is going to do anything for the year," Grant said.
The S&P financial index tumbled nearly 2 percent and was on track for its biggest one-day loss in nearly two months, while the KBW bank index fell 3.3 percent. Goldman Sachs, Wells Fargo, J.P. Morgan, Bank of America and Citigroup dropped between 2-4 percent. The S&P financial index had dipped 0.3 percent this year through Thursday, already making it the worst performing among the 10 major sectors. However, the index had risen 2.5 percent in the past month on prospects of a rate hike as soon as June. At 12:18 pm ET the Dow Jones industrial average was down 44.03 points, or 0.25 percent, at 17,794.53. The S&P 500 was down 8.33 points, or 0.4 percent, at 2,096.93. The Nasdaq Composite was down 32.55 points, or 0.65 percent, at 4,938.82 and was on track to end a streak of seven days of gains.