U.S. stocks closed lower as continued evidence of strength in the labor market fueled speculation the Federal Reserve has room to keep raising rates. Short-dated Treasuries fell. 

• Sign up to get breaking news email alerts sent directly to your inbox

The S&P 500 and the Nasdaq 100 each lost more than 1 per cent after hiring numbers surpassed estimates in a private payrolls report and new claims for unemployment benefits unexpectedly fell last week. The policy-sensitive, two-year Treasury yield climbed the most in a month. The dollar strengthened versus major peers.

Dovish comments from St. Louis Fed President James Bullard, who said rates are getting closer to a sufficiently restrictive zone, briefly improved sentiment, but were not enough to divert focus from hiring data. The Fed has suggested that a tight labor market remains a threat to its efforts to slow inflation, ramping up the stakes for government employment figures due early Friday.

At the same time, officials remain worried that financial conditions could get too loose to effectively crimp economic growth, even after the Fed embarked on the most aggressive tightening campaign in decades. 

“What the Fed really wants to see is some slack build up in the labor markets, in hopes it can do this gently without creating much of a downturn,” Raghuram Rajan, a former governor of India’s central bank, said on Bloomberg Television. “But it may well be that by the time it seems that it will have raised rates enough, that the momentum takes us down to a mild recession at the very least.”

Atlanta Fed President Raphael Bostic contributed to the subdued sentiment on Thursday after he said the central bank still has “much work to do” to tame inflation. He added to a chorus of hawkish Fed officials this week. Minneapolis Fed President Neel Kashkari said Wednesday he expects rates to rise as high as 5.4 per cent, while Kansas City Fed’s Esther George said she favors a rise above 5 per cent. 

Swaps linked to individual Fed decisions jumped and now suggest a peak in the overnight effective rate above 5 per cent in the middle of 2023. The current target range for the Fed is 4.25 per cent to 4.5 per cent and there are around 37 basis points of hikes priced in for the next gathering in February.

Key events this week:

• Eurozone retail sales, CPI, consumer confidence, Friday
• Germany factory orders, Friday
• U.S. nonfarm payrolls, factory orders, durable goods, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 fell 1.2 per cent as of 4:02 p.m. New York time
• The Nasdaq 100 fell 1.6 per cent
• The Dow Jones Industrial Average fell 1 per cent

Currencies

• The Bloomberg Dollar Spot Index rose 0.6 per cent
• The euro fell 0.8 per cent to US$1.0520
• The British pound fell 1.2 per cent to US$1.1909
• The Japanese yen fell 0.6 per cent to 133.38 per dollar

Cryptocurrencies

• Bitcoin rose 0.2 per cent to US$16,851.63
• Ether was little changed at US$1,253.12

Bonds

• The yield on 10-year Treasuries advanced three basis points to 3.71 per cent
• Germany’s 10-year yield advanced four basis points to 2.32 per cent
• Britain’s 10-year yield advanced six basis points to 3.55 per cent

Commodities

• West Texas Intermediate crude rose 1.2 per cent to US$73.72 a barrel
• Gold futures fell 1.1 per cent to US$1,838.60 an ounce