Stocks wobble on jobs report

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NEW YORK (CNNMoney)

The Dow Jones industrial average was flat. The S&P 500 and the Nasdaq gained about 0.2%.

All three indexes opened higher after the Labor Department said the U.S. economy added 195,000 jobs in June, while the unemployment rate held steady at 7.6%.

Economists surveyed by CNNMoney predicted the U.S. economy added 155,000 jobs, while the unemployment rate was expected to have ticked down to 7.5%.

Traders said stocks could be volatile Friday since many money managers are taking the day off. U.S. markets were closed Thursday for the Fourth of July holiday.

Double edged sword. Investors were encouraged to see signs of improvement in the job market, but the report also makes it more likely that the Federal Reserve will begin to taper its stimulus policies later this year.

The Fed has signaled that it will begin to slow the pace of its $85-billion-per-month bond buying program when it sees significant improvement in the unemployment rate.

While the unemployment rate was unchanged last month, economists say the gains in hiring -- including past months that were revised higher -- mean the rate should head lower in the months ahead.

There will be two more reports on the unemployment rate and hiring before the Fed's next scheduled meeting in September.

The report was "more than strong enough to keep the Fed on track for tapering in September," said Jim O'Sullivan, chief U.S. economist at High Frequency Economics.

Bond yields spike. Investors in the bond market seemed to view the good news as bad news.

The yield on the 10-year U.S. Treasury note rose to 2.7% as prices fell. Investors have been selling bonds in anticipation of fewer Fed purchases.

Some economists worry that an abrupt rise in interest rates could hurt the U.S. economy. Mortgage rates have spiked in the past few weeks, raising concerns about the housing market.

But yields on U.S. Treasuries remain low by historical standards, and investors may be overreacting to the risk of fewer Fed purchases, said Bernard Kavanagh, vice president of portfolio management at Stifel Nicolaus.

"We expect rates will stabilize," he said. "Given how low rates have been, it's not unusual to see a stronger reaction in the bond market."

What's next. In the long run, the improvement in the job market and the expected tapering by the Fed should bode well for stocks, said Kavanagh. But he said trading in the short term could be volatile as investors try to game the Fed's next move.

"We're going through a transition from a liquidity-driven equity market to a market more driven by economic and corporate fundamentals," said Kavanagh.

In the currency market, the U.S. dollar rose versus its main trading partners. The greenback has been strong recently as investors bet the U.S. economy will grow faster than most other developed economies.

Meanwhile, Europe got a big boost Thursday when the region's central banks signaled that interest rates would remain at unusually low levels for an extended period of time. These dovish statements pushed down both the euro and pound versus the U.S. dollar.

European markets rallied strongly Thursday and were mixed in Friday afternoon trading.

Related: Fear & Greed Index

Investors will also be monitoring the political turmoil in Egypt, which has sent oil prices higher in the past few days, and in Portugal, where leaders are trying to prevent a government collapse that would undermine its 78-billion euro bailout.

Asian markets ended with gains. The Hang Seng index and the Nikkei in Japan both ran up by roughly 2%. The Shanghai Composite index edged up by 0.1%.

First Published: July 5, 2013: 9:45 AM ET

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