Stocks Fall on Interest-Rate Worries

An unexpectedly sharp gain in December payrolls could delay Fed rate cuts. Also in focus: Motorola, rebounding oil prices

Stocks finished lower Friday, as a stronger-than-expected employment report raised concerns the Federal Reserve might cut interest rates anytime soon. Investors were also digesting a profit warning from Motorola (MOT) and a modest rebound in oil prices after their recent plunge.

On Friday, the Dow Jones Industrial average fell 99.66 points, or 0.8%, to 12,381.03. The broader Standard & Poor's 500 index dropped 10.55 points, or 0.74%, to 1,407.79. The tech-heavy Nasdaq composite tumbled 24.98 points, or 1.02%, to 2,428.45.

A solid employment report was in focus. U.S. nonfarm payrolls climbed 167,000 in December, from an upwardly revised 154,000 in November. October's gain was revised higher, as well.

The payrolls figures were much stronger than expected, analysts say. "The report will both provide a sharp body-blow to the hard landing camp, while boosting Fed inflation fears via the steep upward climb in wages," says Action Economics.

The report also revealed a 0.5% jump in average hourly earnings, the largest monthly increase since April. "To Fed members concerned about a tight labor market, this aspect of the report will be seen as critical," says Bank of America senior economist Peter Kretzmer in a note to clients. "While economic growth may still soften in early 2007, today's report showed none of the labor market softening that would likely be necessary to induce modest Fed easing. "

Meanwhile, Boston Fed President Cathy Minehan warned, "Risks abound, both to growth and inflation." Fed Chairman Ben Bernanke spoke at a conference in Chicago, but avoided comments on rate policy or the economy.

Looking ahead, next week's economic calendar holds reports on retail sales, business inventories, import prices, and international trade. Earnings season kicks off in earnest Jan. 9 with quarterly results from Alcoa (AA).

Oil prices settled higher Friday after two straight days of losses amid unseasonably warm weather and a bearish inventory report. In the energy markets, February West Texas Intermediate crude oil futures rose 72 cents to $56.31 a barrel, down nearly 8% for the week. Earlier in the session, crude touched $54.90, its lowest price since June, 2005.

Among stocks in the news, Motorola was sharply lower after the cell-phone maker lowered estimates for its fourth-quarter earnings and sales. Deutsche Bank cut its rating on the stock from buy to hold.

Analyst downgrades weighed on other tech stocks, as well. Intel (INTC) was slightly lower after Credit Suisse reduced its recommendation on the stock from neutral to underperform.

Shares of Dell (DELL) slipped after J.P. Morgan dropped its rating on the computer maker from neutral to underweight.

On the upside, Exxon Mobil (XOM) was higher amid rebounding oil prices. Shares fell earlier after Lehman Brothers downgraded the stock from overweight to equal weight.

In retail, electronics seller Best Buy (BBY) was modestly higher and rival Circuit City (CC) was lower after both companies reported solid December sales.

European markets finished lower. The FTSE-100 index in London fell 66.9 points, or 1.06%, to 6,220.1. Germany's DAX index dropped 81.31 points, or 1.22%, to 6,593.09. In Paris, the CAC 40 index was down 57.21 points, or 1.03%, to 5,517.35.

Asian markets ended mixed amid falling commodity prices. In Japan, the Nikkei 225 index slid 262.08 points, or 1.51%, to 17,091.59. In Hong Kong, the Hang Seng index gained 185.7 points, or 0.93%, to 20,211.28. Korea's Kospi index lost 11.53 points, or 0.83%, to 1,385.76.

Treasury Market

Treasury yields pressed higher following the firm payrolls print. The 10-year note fell in price to 99-26/32 for a yield of 4.65%, while the 30-year bond dropped to 96-07/32 for a yield of 4.74%. Bonds recovered from their worst levels of the day, possibly reflecting position-suqaring ahead of the weekend, says S&P.

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