U.S. stocks fell for a second day in a row amid a spike in Treasury yields after surprisingly strong private hiring data. Traders are preparing for Friday payroll numbers to gauge the Federal Reserve’s next move.

The S&P 500 and Nasdaq 100 benchmarks both fell after figures published Thursday by the ADP Research Institute showed U.S companies added the most jobs in over a year in June, underscoring the ongoing strength of the labor market. Swap contracts linked to future policy decisions almost fully priced in a quarter-point increase by July 26 and showed a growing likelihood of an additional hike by year end.

Stocks on the move included Exxon Mobil Corp., which fell after forecasting a US$4 billion hit to earnings, while some of the year’s best performers, including Nvidia Corp. and Tesla Inc., slid. 

Treasury yields rose across the curve after the ADP report and extended their climb after data showing the service sector expanded in June at the fastest pace in four months. The policy sensitive two-year rate climbed above 5 per cent to a 16-year high before the move faded, while the 10-year rose to 4.08 per cent for the first time since March. 

Private payrolls increased 497,000, more than double the median estimate in a Bloomberg survey of economists. Separate data from Challenger, Gray & Christmas Inc. showed the pace of job cuts by U.S. employers slowed in June. 

The numbers stunned Wall Street.

“The strength of the U.S. labor market is almost unbelievable and this should further push out any concept of a possible recession in the U.S.,” said Scott Ladner, chief investment officer at Horizon Investments. “But, it should also push out of the market any hopes of a Fed rate cut during 2023.”

The report was “literally off the charts relative to what was expected,” according to Peter Boockvar, chief investment officer of Bleakley Financial Group. “This jobs report squares with nothing in the survey data, nor the claims figures and from what companies themselves have been saying about hiring intentions, especially with the lackluster growth in the economy.”

Dallas Fed President Lorie Logan voiced her concerns that inflation was still running too hot and more rate hikes were needed at an event in New York Thursday. Stocks have been losing ground after a strong first half of the year as continued hawkishness from central banks dampens hopes of a soft landing for the global economy. 

“The selloff is driven by the idea that the economy is a freight train that can’t be stopped and that the Fed is going to have to work even harder,” said David Donabedian, chief investment officer of CIBC Private Wealth U.S. “And you certainly see that in the bond market, where you have an even more dramatic reaction.”

Friday’s nonfarm payrolls and unemployment reports may provide further clues on the Fed’s policy path. Economists surveyed by Bloomberg are expecting figures to moderate, though it remains to be seen if that will be enough to steer the central bank away from another rate increase. Earlier this week, minutes from the Fed’s June meeting showed division among policymakers over the decision to pause rate hikes, with the voting members on track to take rates higher later this month.

Next week, the big banks will usher in second quarter earnings with reports from Citigroup Inc. and JPMorgan Chase & Co.

Despite the uncertainties, there’s a number of ways to participate in equities right now, according to Liz Ann Sonders, chief investment strategist at Charles Schwab, who said she has been particularly “factor-focused.”

“We think focusing on those quality-based factors with span both on the growth factor side of things and the value factor side of things is the way to approach what you are doing inside your equity allocation,” she told Bloomberg TV.

Meanwhile, a gauge of the dollar strengthened while Bitcoin and gold slipped. Treasury Secretary Janet Yellen touched down in Beijing on Thursday to attempt to further repair the relationship between the world’s two largest economies.

Key Events This Week:

• U.S. unemployment rate, nonfarm payrolls, Friday
• ECB’s Christine Lagarde addresses an event in France, Friday
• Some of the main moves in markets today:

Stocks

• The S&P 500 fell 0.8 per cent as of 4:02 p.m. New York time
• The Nasdaq 100 fell 0.8 per cent
• The Dow Jones Industrial Average fell 1.1 per cent
• The MSCI World index fell 1.2 per cent

Currencies

• The Bloomberg Dollar Spot Index was little changed
• The euro rose 0.3 per cent to US$1.0887
• The British pound rose 0.3 per cent to US$1.2740
• The Japanese yen rose 0.4 per cent to 144.10 per dollar

Cryptocurrencies

• Bitcoin fell 0.4 per cent to US$30,340.2
• Ether fell 1.2 per cent to US$1,887.2

Bonds

• The yield on 10-year Treasuries advanced 11 basis points to 4.04 per cent
• Germany’s 10-year yield advanced 15 basis points to 2.63 per cent
• Britain’s 10-year yield advanced 17 basis points to 4.66 per cent

Commodities

• West Texas Intermediate crude rose 0.1 per cent to US$71.88 a barrel
• Gold futures fell 0.6 per cent to US$1,916.30 an ounce