Major US stock indices declined sharply during Friday's late trading session, with the Nasdaq Composite plunging 4%, as a much stronger-than-expected May jobs report intensified expectations for Federal Reserve interest rate hikes this year.
Meanwhile, shares of mortgage giants Fannie Mae and Freddie Mac surged at the open, driven by former President Trump's comments valuing the companies at "trillions," providing a notable highlight in the market.
Unexpected Labor Market Strength Boosts Rate Expectations
The US Bureau of Labor Statistics reported on Friday that non-farm payrolls increased by 172,000 in May, nearly double the market consensus of 85,000, with the data for March and April revised up by a combined 93,000 jobs.
The unemployment rate held steady at 4.3%, matching forecasts.
Following the jobs report, market bets on Fed rate hikes increased significantly.
According to the CME FedWatch Tool, traders have fully priced in a 25-basis-point rate hike by December, with the probability of a move by October rising to around 60%.
In response, the yield on the benchmark 10-year US Treasury note jumped nearly 5 basis points to above 4.5%.
Tech Stocks Under Pressure as Nasdaq Leads Declines
Tighter interest rate prospects weighed heavily on high-valuation technology and growth stocks.
By the late session, the Nasdaq Composite was down 4%, the S&P 500 index had fallen about 2.6%, and the Dow Jones Industrial Average was down roughly 1.3%.
The technology sector overall declined more than 4%, leading losses across all sectors.
Chip stocks faced intense selling pressure, with the Philadelphia Semiconductor Index dropping over 6%.
Shares of Nvidia, Broadcom, Micron Technology, and AMD each fell between 5% and 9%.
These four companies alone shed a combined market capitalization of over $500 billion by midday.
Defensive Sectors Attract Inflows
As market risk aversion grew, capital rotated noticeably into defensive sectors.
The consumer staples, healthcare, and utilities sectors recorded gains.
Coca-Cola shares rose about 3.8%, while Travelers contributed a 54-point gain to the Dow Jones index.
Significant Volatility for Mortgage Giants
Mortgage giants Fannie Mae and Freddie Mac became a focal point during the session.
Former President Trump had previously suggested the two companies could be worth as much as $1 trillion.
Spurred by these remarks, the stocks surged at the open, with Fannie Mae briefly gaining over 10% and Freddie Mac jumping nearly 10%.
However, prices later retreated as market concerns grew over the government's progress in advancing their potential IPO processes.
A key factor fueling the concern is Trump's appointment this week of Bill Pulte, the head of the Federal Housing Finance Agency which regulates the two firms, to also serve as acting Director of National Intelligence.
Analysts noted that Pulte's dual roles could divert his attention, introducing fresh uncertainty into the already complex process of releasing the companies from government conservatorship.
Analysts at KBW estimate the combined fair value of the two companies to be between $200 billion and $250 billion, far below the trillion-dollar valuation suggested by Trump.
Year-to-date, shares of the two mortgage giants have fallen more than 30%.
Market Outlook
The robust jobs data has pushed the Fed's policy path in a more hawkish direction.
Analysts believe this could create greater resistance for the new Fed Chair, should they attempt to push for easier monetary policy.
Mark Zandi, chief economist at Moody's, warned that if inflation expectations continue to climb, the Fed may be forced to raise rates, even if it risks triggering an economic downturn.
For investors, the defensive positioning by institutional funds suggests the market is preparing for a "higher for longer" interest rate environment.
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