Stocks slump on rate concerns

NEW YORK (CNNMoney.com) -- Stocks slipped Friday afternoon after a pair of strong economic reports and a big sell-off in the bond market caused investors to retreat after the recent rally.

The Dow Jones industrial average (down 39.78 to 11,978.76, Charts) and the broader S&P 500 (down 5.04 to 1,362.30, Charts) index both lost around 0.3 percent roughly 3 hours into the session. The tech-fueled Nasdaq composite (down 15.70 to 2,318.32, Charts) lost 0.6 percent.

Stocks had risen modestly at the open, as investors digested a surprisingly upbeat October employment report, and a bullish read on the services sector of the economy, released shortly after the open.

But the bond market took the one-two punch of strong economic news as a sign that the Federal Reserve is no longer likely to cut interest rates as soon as early next year, as many on Wall Street had been betting.

Stocks have been under pressure lately, with the Dow sliding for five sessions in a row in response to a spate of weaker economic reports.

The employment report and the ISM services report marked the first group of mostly upbeat economic news in at least a week.

"This was bad news for the bond market and mixed news for the stock market," said Jeff Kleintop, chief investment strategist at PNC Wealth Management.

"It shows the economy isn't weakening as rapidly as had been feared," he said, "but it also suggests we can expect tighter monetary policy for longer than has been expected."

The unemployment rate fell to 4.4 percent in the month, a five-year low, the Labor Department reported Friday morning. Economists thought it would hold steady at 4.6 percent.

Additionally, the government said that employers added 92,000 jobs to their payrolls in the month, down from an upwardly revised 148,000 in September. Economists were looking for a gain of 125,000.

But the upward revision to job growth earlier in the year left the total number of jobs added in 2006 at a higher-than-expected level, perhaps overshadowing the modest October gains.

Average hourly earnings, the report's inflation component, rose 0.4 percent versus forecasts for a rise of 0.3 percent. Earnings rose 0.2 percent in September.

Released shortly after the open, the Institute for Supply Management's services sector index rose to 57.1 in October from 52.9 in September, topping forecasts for a rise to 54.5. While the report is less of a market mover than the employment report, it added credence to the feeling among investors that the economy is not as weak as had been thought.

Treasury prices slumped after the jobs report on bets the strong job market makes it unlikely the Fed will start cutting interest rates early next year. The drop raised the yield on the 10-year note to 4.72 percent from 4.60 percent late Thursday. Bond prices and yields move in opposite directions.

Stocks of companies that are sensitive to rate hikes fell, including financials and homebuilders.

The Amex Securities Broker/Dealer (Charts) index fell 1.1 percent.

The Dow Jones Home Construction (Charts) index lost 1.5 percent.

Among other movers, Whole Foods Market (down $14.06 to $46.06, Charts) slid 20 percent in active Nasdaq trade after warning late Thursday that 2007 sales and earnings growth will slow, due to competition from traditional grocery stores and Wal-Mart (Charts). The forecast overshadowed the company's otherwise upbeat fourth-quarter report.

Qualcomm (down $0.32 to $36.04, Charts) reported fiscal fourth-quarter earnings and sales late Thursday that rose from a year ago and topped estimates. The company also issued a fiscal first-quarter forecast in a range setting the midpoint below analysts' estimates. Shares rose Friday morning, but turned lower at midday.

Shares of Electronic Arts (up $6.65 to $59.65, Charts) rallied 11 percent in active trading. Late Thursday, the video game maker reported higher quarterly earnings and revenue that beat estimates and also boosted its full-year sales forecasts.

Market breadth was negative. On the New York Stock Exchange, losers topped winners three to two on volume of 650 million shares. On the Nasdaq, decliners beat advancers by a narrow margin on volume of 905 million shares.

Higher oil prices added to the market's troubles. U.S. light crude oil for December delivery jumped $1.37 to $59.25 a barrel on the New York Stock Exchange.

In currency trading, the dollar gained versus the euro and the yen.

COMEX gold for December delivery fell $1.30 to $626.50 an ounce.

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