Dow surges 700 points Friday, S&P 500 snaps four-week losing streak after employment report shows wage gains cooled in December

What drove markets

Stock-market bulls cheered Friday’s jobs report showing wage growth cooled last month, in a sign of inflation pressures easing.

Equities climbed sharply in a “sign of relief,” even if the Federal Reserve’s battle bringing down high inflation is not yet done, said Bob Doll, chief investment officer at Crossmark Global Investments, in a phone interview Friday.

“I think people are saying, ‘well, maybe inflation is continuing to come down,’” said Doll. “It takes as little pressure off the Fed. That’s good news.”

The U.S. Bureau of Labor Statistics said Friday that 223,000 jobs were created in December, with the unemployment rate edging down to 3.5%. That was above expectations for 200,000 new jobs, though the pace of job creation slowed from 256,000 in November. Meanwhile, wages grew by 0.3% in December, slightly less than expected and down from 0.4% a month earlier.

See: U.S. adds 223,000 jobs in December and jobless rate matches 55-year low of 3.5%

“The Fed’s biggest challenge in getting the inflation rate down would be wages,” said Doll. “The labor market has remained pretty resilient.”

While the pace of wage growth has slowed slightly, workers continued to command higher pay, even if wages have lagged headline inflation.

“This is not going to push the Fed off its agenda one iota,” said Brad Conger, deputy CIO at Hirtle, Callaghan & Co., in commentary about Friday’s data.

Numerous Fed officials have made clear that they want to see unemployment climb in order to help suppress inflation and engineer a return to the Fed’s 2% target. Senior Fed officials expect unemployment to rise by nearly a percentage point in 2023, according to projections released in December.

“We have witnessed a marked deterioration in temporary help services in recent months, and a slowing in wage growth in December, which both highlight the relative slowdown in the labor market overall, even as the services sector remains quite buoyant,” said Rick Rieder, BlackRock’s CIO of global fixed income and head of the firm’s global allocation investment team, in emailed comments on Friday’s employment report.

“Yet, while the softening trend is clear, and the momentum of hiring is slowing in a significant way, it is equally clear that we are far from what could be described as a demand-reducing weakening of labor and wage conditions,” Rieder said.

Fed officials cautioned on Friday that the central bank’s inflation battle continues.

The Fed has “more work to do,” Atlanta Fed President Raphael Bostic said Friday during a speech on a panel sponsored by the National Association of Business Economics in New Orleans. Bostic said he would like to see the Fed raise its benchmark rate above 5%, but “not a lot above 5%.”

Also on Friday, Fed Governor Lisa Cook said in a speech at the meeting of the American Economic Association in New Orleans that “inflation remains far too high, despite some encouraging signs lately, and is therefore of great concern.”

The S&P 500 index has fallen around 17% over the past 12 months after the Fed raised interest rates by 4.25 percentage points in 2022 in an attempt to crush inflation that hit a four-decade high of 9.1% in June based on the consumer-price index.

In other economic data released Friday, the Institute for Supply Management said that its services sector index fell to 49.6% in December from 56.5% in November. Numbers under 50% are a sign the economy is contracting, with the index’s reading for December turning negative for the first time since May 2020.

That’s “very strange,” said Eugenio Aleman, chief economist at Raymond James, in a phone interview Friday. Aleman said that “seasonal factors” may have led to the contraction and that he expects the ISM services index could climb back into expansion territory at the next monthly reading.

Still, Aleman said he’s expecting a “shallow” recession to begin in the second quarter, and that the Fed might pause its rate hikes after potentially hiking by 25 basis points at each of its next two meetings.

Companies in focus

• Southwest Airlines Co. 
  LUV,
  +4.62%
  shares ended 4.6% higher after the airline warned Friday that it expects to report a surprise net loss for the fourth quarter after canceling thousands of flights over the holidays.

• Tesla Inc. shares rose 2.5% after the electric vehicle maker cut prices in China again.

• World Wrestling Entertainment 
  WWE,
  +16.98%
  shares soared 17% as founder Vince McMahon returned to the company.

• Shares of Bed Bath & Beyond Inc.
  BBBY,
  -22.49%
  slumped 22.5% as the company said it was likely to file for bankruptcy.

• Costco Wholesale Corp. 
  COST,
  +7.26%
  shares jumped 7.3% on strong holiday sales. 

—Jamie Chisholm contributed to this article.