US open: Stocks drop as strong payrolls reinforce rate hike expectations

US stocks fell in early trade on Friday as a strong non-farm payrolls report added weight to rate hike expectations.

At 1445 GMT, the Dow Jones Industrial Average was down 0.9% to 25,971.13, while the S&P 500 was off 0.7% to 2,802.80 and the Nasdaq was 0.4% lower at 7,351.34.

Stocks had been called to open lower already amid rising global bond yields and the downbeat tone in equity markets was only exacerbated after data revealed that US average hourly earnings surged in January as more jobs were added than expected, adding strength to the conviction that interest rates will be hiked three or even four more times this year.

There were 200,000 new jobs added in the first month of 2018, the non-farm payrolls reported showed, which was better than the 180,000 forecast and the 160,000 added the month before. December payrolls were revised up to 160,000 from the initial growth indicated of 148,000, while November's growth was revised down to 216,000 from 252,000.

Unemployment was left unchanged at 4.1% for January, as expected, but average earnings grew 2.9% year-on-year versus the 2.6% Wall Street estimate and up from the 2.5% a month earlier. Month-on-month earnings were up 0.3%, in line with forecasts and following an upwardly-revised 0.4% gain for the previous month.

The dollar spiked against most currencies after the release and by 1445 GMT was trading up 0.7% versus sterling, 0.4% higher against the euro and 0.9% firmer versus the yen.

Pantheon Macroeconomics said: “In short, the labour market is tight, getting tighter, and employees are becoming more expensive. The question for the Fed now is whether the plan for ‘gradual’ tightening will be enough if wage gains accelerate further. If much further/faster rates hikes are to be avoided, with unpleasant consequences for asset prices, we have to see both productivity growth and labour participation rise markedly, and soon. It isn't happening yet. We still look for four hikes this year."

Minneapolis Federal Reserve President Neel Kashkari told CNBC that the January jobs report was "one of the first signs" of wage growth.

"The most important thing that I saw in a quick review of the jobs data is wage growth," he said. "We've been waiting for wage growth. Everyone's been declaring we're at maximum employment. More Americans have been coming in, which is a really good thing. But there hasn't been much wage growth. This is one of the first signs that we're seeing wage growth finally starting to pick up."

In corporate news, Amazon surged after it said late on Thursday that full-year revenue rose 31% to $178bn, while profit rose to $3bn from $2.4bn the year before.

Technology giant Apple was on the back foot after its results for the three months to the end of December released late on Thursday fell short of analysts’ expectations for iPhone sales.

Google parent Alphabet was sharply lower after its quarterly earnings were hit by rising costs.

Investors were also wading through numbers from Mattel, Estee Lauder, Merck, Chevron and Exxon Mobil, along with Sprint and Charter Communications.

Still to come, the University of Michigan consumer sentiment index is at 1500 GMT.