By Caroline Valetkevitch
NEW YORK, Feb 3 - U.S. stock investors head into next week with fresh concerns about inflation and interest rates after Friday's payrolls report showed robust job and wage growth, while a less-than-stellar earnings picture could add to weaker sentiment.
Oil prices above $65 a barrel also could dampen the mood for bulls on Wall Street, as worries over possible United Nations sanctions against No. 4 oil exporter Iran over its nuclear program continue.
Friday's report from the Labor Department tripped the market, helping push stocks down for a second straight day.
"We'll have a spillover effect from the jobs report ... with the debate heating up about the inverted yield curve and the Fed making a move past the March meeting," said Fred Dickson, strategist at Montana-based D.A. Davidson & Co.
Fed policy makers raised interest rates for a 14th time on Tuesday and hinted more rate hikes might be needed to curb
inflation. This week's data showing a tighter job market raised warning flags about the economy, analysts said.
The Labor Department report showed the U.S. unemployment rate fell to 4.7 percent, its lowest level since July 2001.
January payrolls added 193,000 jobs, below expectations,
but payroll numbers for other months were revised higher,
depicting strength in the labor market. Average hourly earnings
went up 3.3 percent in the past 12 months, the largest for such
a period in nearly three years.
"If the economy continues to move along at a good pace, having some increase in labor costs, you'd expect," said Hans Olsen, chief investment officer at Bingham Legg Advisers in Boston. "But to have it look like it's slowing and these increasing labor costs, that's not a good combination.
"It certainly places a headwind on stock prices."
The yield curve, or the spread between the yields of the two-year and the 10-year U.S. Treasury notes, inverted further by the end of the week. Late Friday, the two-year note's yield was 4.58 percent -- or 5 basis points higher than the 10-year note's yield. This made stock investors nervous because an inverted yield curve has preceded recessions in the past.
Demand for 30-year bonds on Friday -- ahead of next week's U.S. Treasury auction reviving the long bond -- helped push long-term debt yields lower, analysts said, and indicated the inversion of the yield curve could become deeper.
In the coming week, Wall Street will watch for Friday's report on the U.S. international trade deficit for December.
The U.S. trade gap for December is forecast at $65 billion, exceeding November's $64.21 billion, according to economists polled by Reuters.
STOCKS FINISH THE WEEK LOWER
For the week, the Dow Jones industrial average <.DJI> fell 1.04 percent, the Standard & Poor's 500 Index <.SPX> lost 1.54 percent, and the Nasdaq <.IXIC> shed 1.81 percent.
"This jobs report is what's hitting the market," Al Goldman said on Friday.
Goldman, who is chief market strategist at A.G. Edwards, added that "it's some follow-on weakness to yesterday's big blood-letting, which goes back to the fact that we had a very good January, and we were entitled to a pullback.
"If the market gets a couple of more days of weakness, I'd say the correction is over."
EARNINGS GIVE MIXED SIGNALS
The number of big-name companies reporting earnings next week will be lighter than in recent weeks, Dickson said.
Among companies expected to report results are The Walt
A number of insurers, including Aetna Inc.
Dickson projects fourth-quarter earnings growth for S&P 500 companies at 12 percent to 13 percent.
The number of S&P 500 companies exceeding earnings-per-share estimates this reporting period is still above 60 percent, according to Reuters Estimates,
But disappointing reports from a number of high-profile
companies, including Intel Corp.
"It doesn't set a real positive stage," Olsen said. "It makes it difficult for stock prices to go anywhere."
OIL ABOVE $65 A BARREL
Higher oil prices, which tend to weigh on stocks because they raise costs for corporations and consumers, are still cause for concern, analysts said.
U.S. crude for March delivery
"Investors will be focusing on Iran and any developments there, as it might have implications on the price of oil, and of course, the future of the world," said Goldman, the A.G. Edwards strategist.
The United Nations nuclear watchdog deferred until Saturday a vote to report Iran to the U.N. Security Council over fears it is aiming to make atomic bombs, as the European Union lobbied developing nations to back the measure.
(Wall St Week Ahead runs weekly. Any questions or comments on this column can be e-mailed to: caroline.valetkevitch(at)reuters.com)
(Additional reporting by Emily Chasan and Pedro Nicolaci da Costa)
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