Gold fall after strong October jobs report, as higher interest rates now look likely

TD Precious metal

NEW YORK, N.Y. - Stocks had a mixed reaction Friday to the surprisingly strong October jobs report as investors adjusted to the prospect of higher interest rates as early as next month.

While the major indexes, on the surface, had a muted reaction to the jobs numbers, a look at the individual parts of the market showed investors were actively reshuffling their portfolios.

Dividend-paying stocks, which are typically bought for their higher-than-average payouts when interest rates and bond yields are low, dropped sharply on Friday. The Dow Jones utility index, a basket of 15 dividend-paying utility stocks, sank 4 per cent.

In contrast, bank stocks rose sharply as investors bet that higher interest rates would translate into higher profits, since they may be able to charge more for lending. JPMorgan Chase rose $2.02, or 3 per cent, to $68.46, Bank of America rose 64 cents, or 3.7 per cent, to $17.95 and Morgan Stanley rose $1.53, or 4.5 per cent, to $35.41.

"You just need to look at those two groups and see that the market is positioning itself for higher interest rates," said Ryan Larson, head of equity trading at RBC Global Asset Management.

Wall Street has been in a months-long guessing game about the Federal Reserve, trying to figure out when the policymakers at the nation's central bank will finally raise interest rates. The market turmoil over the summer kept the Fed from raising rates at their September meeting, and policymakers decided to wait yet again at their October meeting to see more signs the U.S. economy was on sure footing.

By nearly every account, the October jobs report gave the Fed exactly what they wanted. The Labor Department said U.S. employers added 271,000 jobs, far more than the most hopeful of expectations, and the unemployment rate dipped to a fresh seven-year low of 5 per cent, from 5.1 per cent. The burst of hiring, the most in 10 months, filled jobs across a range of industries.

"This makes it pretty likely the Fed will raise rates in December," said Priscilla Hancock, a global fixed income strategist for J.P. Morgan Asset Management.

Fed fund futures, which are securities that bet on which way the Fed will move interest rates, now show a 74 per cent chance of the central bank raising rates in December, up from 60 per cent on Wednesday and up from well below 50 per cent as recently as late summer. But the size of the predicted interest rate increase remains modest. Investors expect interest rates will go from their current 0-to-0.25 per cent levels to 0.5 per cent.

"The Fed is still going to be extremely accommodative for investors. A rate hike in December is removing those emergency measures that the bank put into place during the financial crisis," Hancock said.

The Dow Jones industrial average rose 46.90 points, or 0.3 per cent, to close at 17,910.33. The Standard & Poor's 500 index fell less than a point to 2,099.20 and the Nasdaq composite rose 19.38 points, or 0.4 per cent, to close 5,147.12.

The bond market's reaction to the jobs number was far more volatile than the stock market's, with bond prices sinking as investors scaled back their holdings of Treasuries and safer investments.

The benchmark 10-year U.S. Treasury note rose to a yield of 2.32 per cent from 2.23 per cent on Thursday, a big move for that security. The two-year note jumped to a yield of 0.89 per cent, a five-year high for that note, from 0.83 per cent the day before.

The data also caused the dollar to rise sharply against its major currency counterparts. The euro fell to $1.0742, its lowest level in six months, and the dollar rose against the Japanese yen to 123.19.

The stronger dollar caused a selloff in commodities as well. Benchmark crude oil fell 91 cents, or 2 per cent, to $44.29 a barrel and Brent crude, which is used to price international oils, fell 56 cents, or 1.2 per cent, to $47.42 a barrel. Gold fell $16.50, or 1.5 per cent, to $1,087.70 an ounce, silver fell 29 cents, or 2 per cent, to $14.69 an ounce and high-grade copper fell a penny, or 0.6 per cent, to $2.242 a pound.

In other energy trading, heating oil rose less than a cent to $1.49 a gallon, wholesale gasoline futures rose a penny to $1.37 a gallon and natural gas rose 0.7 cent to $2.371 per 1,000 cubic feet.