Stocks tumble on weak jobs report

NEW YORK (CNNMoney.com) -- Stock declines accelerated Friday morning, after the government reported a surprise decline in August payrolls, the first drop in four years.

Treasury prices jumped as investors sought safety and the dollar plunged. Gold prices jumped as well.

The Dow Jones industrial average (down 201.19 to 13,162.16, Charts) lost almost 200 points, or around 1.5 percent over 90 minutes into the session. The broader S&P 500 (down 22.92 to 1,455.63, Charts) index lost 1.5 percent. The tech-fueled Nasdaq Composite (down 51.25 to 2,563.07, Charts) retreated 1.9 percent.

Employers reported that payrolls fell by 4,000 in August, when Wall Street economists were expecting payrolls to grow by 110,000, according to Briefing.com estimates. June and July job growth figures were revised lower.

"The report was pretty bad," said Joshua Shapiro, chief economist at Maria Fiorini Ramirez Inc. "We knew it would be soft, but not this soft."

The unemployment rate, generated by a separate survey, held steady at 4.6 percent, as expected.

The surprisingly weak report seemed to confirm bets that the Federal Reserve will cut the fed funds rate, a key short-term interest rate, when it meets Sept. 18. Whether the Fed would cut at the next meeting and by how much has been in debate over the last few weeks as investors mulled the credit crisis versus signs of a still-strong economy.

Shapiro said that a rate cut is "pretty much a done deal at this time," with the question as to whether the central bankers cut by 25 or 50 basis points and how strongly they word the statement. There are 100 basis points in one percentage point.

The fed funds rate, which impacts consumer loans, has stood at 5.25 percent since June 2006. In mid-August, the central bank cut the largely symbolic discount rate, which impacts bank loans.

Treasury prices surged in a classic "flight to quality" move that also signals that Wall Street expects the Fed to cut interest rates. The rally lowered the yield on the 10-year note to 4.42 percent from 4.50 percent late Thursday. Bond prices and yields move in opposite directions.

Gold prices also jumped in response to the report. COMEX gold for December delivery rose $5.90 to $710.50 an ounce.

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

U.S. light crude oil for October delivery fell 15 cents to $76.15 a barrel on the New York Mercantile Exchange.

Stock declines were broad based, with 28 out of 30 Dow issues falling, led by Alcoa (down $1.74 to $34.76, Charts, Fortune 500), Caterpillar (down $1.77 to $73.98, Charts, Fortune 500), General Motors (down $1.03 to $30.02, Charts, Fortune 500) and Intel (down $0.79 to $25.36, Charts, Fortune 500).

Among other movers, shares of Harley-Davidson (down $4.37 to $49.72, Charts, Fortune 500) slumped 8 percent in active New York Stock Exchange trading after the motorcycle maker cut its outlook for shipments and sales through the rest of the year, due to a slowdown in consumer spending.

Krispy Kreme Doughnuts (down $1.44 to $4.89, Charts) plunged 21 percent in active New York Stock Exchange trading after the company reported a steeper quarterly loss versus a year ago.

On the upside, precious metal stocks jumped in tune with the rising price of gold, sending the Amex Gold Bugs (up $3.83 to $361.10, Charts) index up 1.3 percent.

Market breadth was negative. On the New York Stock Exchange, losers beat winners five to one on volume of 440 million shares. On the Nasdaq, decliners topped advancers by a similar margin as 600 million shares changed hands.