Wall St rallies as jobs, services data calm rate hike worries

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By Sinéad Carew and Ankika Biswas

(Reuters) - Wall Street's main indexes closed higher on Friday on news that while U.S. payrolls expanded more than expected, wage increases slowed and services activity contracted, easing worries about the Federal Reserve's interest rate hiking path.

U.S. nonfarm payrolls rose by 223,000 jobs in December, Labor Department data showed, while a 0.3% rise in average earnings was smaller than expected and less than the previous month's 0.4%.

In another set of data, U.S. services activity declined for the first time in more than 2-1/2 years in December as demand weakened, with more signs of inflation easing.

"We got good news on the inflation front with wage gains that are slowing. We got participation rates pick up again and yet we're still creating jobs. It's a kind of a win-win for the economy. And on the other side the ISM services report was really weak and broadly weak," said Megan Horneman, chief investment officer at Verdence Capital Management in Hunt Valley, Maryland.

"That's basically making people think the Fed is nearing the end of what's been one of the most aggressive tightening cycles we've seen in decades. That's why the markets are taking off."

According to preliminary data, the S&P 500 gained 86.34 points, or 2.27%, to end at 3,894.44 points, while the Nasdaq Composite gained 259.71 points, or 2.52%, to 10,564.95. The Dow Jones Industrial Average rose 694.21 points, or 2.11%, to 33,624.29.

All three averages showed gains for the week, with both the benchmark S&P and the Nasdaq snapping four weeks of declines.

John Augustine, chief investment officer at Huntington National Bank in Columbus, Ohio, pointed to an easing of worries that the Fed would raise rates so much that it causes a recession.

"Today's reports may alleviate that pressure to force a recession. They may already have slowed down the economy enough. They just need validation from inflation reports."

Still the Fed last month projected an a interest rate target peak of around 5% and said it would keep rates high until inflation is where it wants it to be.

Fed officials on Friday acknowledged cooling wage growth and other signs of a gradually slowing economy, with Atlanta President Raphael Bostic hinting at the chance of a quarter percentage point hike at the next policy meeting.

But Huntington's Augustine said the central bank needs to see further slowing of price increases in the December inflation report, due out on Thursday, before deciding whether to slow its next rate hike. It raised rates 50 basis points in December.

Also next week several of the biggest U.S. banks including JPMorgan (NYSE:JPM) and Bank of America (NYSE:BAC) will kick off the fourth-quarter earnings season on Friday.

"That's the part of the puzzle people haven't been able to figure out. How much should earnings estimates be cut for the calendar year or have they been cut enough?" said Horneman at Verdence.

All the major S&P 500 indexes gained with materials in the lead for much of the session.

Consumer staples was boosted by Costco Wholesale Corp (NASDAQ:COST), whose shares jumped after the membership-only retailer reported strong December sales growth.

Pfizer Inc (NYSE:PFE) shares advanced after reports of talks with China to secure a license that will allow domestic drugmakers to manufacture and distribute a generic version of the U.S. company's COVID-19 antiviral drug Paxlovid in China.

Bed Bath & Beyond Inc (NASDAQ:BBBY) slid after Reuters reported that the home goods retailer was preparing to seek bankruptcy protection in coming weeks.