US STOCKS-Wall Street ends lower as blowout job data stokes inflation fears

Updates to market close

By Johann M Cherian, Sukriti Gupta and Carolina Mandl

Jan 10 (Reuters) - U.S. stocks sank on Friday, with the S&P 500 erasing its 2025 gains, after an upbeat jobs report stoked fresh inflation fears, reinforcing bets that the Federal Reserve will be cautious in cutting interest rates this year.

Wall Street's main indexes closed their second consecutive week in the red.

"We started the year on the wrong foot," said Sam Stovall, market strategist at CFRA Research, commenting on the impact of a hotter-than-expected job data on equities. He added the environment for stocks could become "quite challenging."

According to preliminary data, the S&P 500 .SPX lost 91.26 points, or 1.54%, to end at 5,826.99 points, while the Nasdaq Composite .IXIC lost 318.69 points, or 1.64%, to 19,160.19. The Dow Jones Industrial Average .DJI fell 698.14 points, or 1.64%, to 41,937.06.

The domestically focused small-cap Russell 2000 index .RUT also fell. Wall Street's fear gauge .VIX hit a three-week high on Friday.

A Labor Department report showed job growth unexpectedly accelerated in December while the unemployment rate fell to 4.1% as the labor market ended the year on a strong note.

A hotter-than-expected job gain could translate into faster economic expansion, leading to a rise in prices. To contain a still-elevated inflation, the Fed could be forced to take a more conservative stance on rate cuts this year.

Traders see the central bank lowering borrowing costs for the first time in June and then staying steady for the rest of the year, according to the CME Group's FedWatch Tool.

Brokerages also revised their Fed rate cut forecasts, with BofA Global Research forecasting a potential rate hike.

However, Chicago Fed president Austan Goolsbee said there is no evidence the economy is overheating again, adding he still expects it will be appropriate to lower interest rates further.

Pressuring stocks, the yield on the 30-year Treasury note US30YT=RR touched 5% - its highest since November 2023, but slightly retreated to 4.966%.

Most of the 11 S&P 500 sectors declined.

Adding to the dour mood, a University of Michigan survey showed consumer sentiment dropped to 73.2 in January from the previous month.

Fresh inflation worries have taken the spotlight, compelling the Fed to issue a cautious forecast on monetary easing last month, as it anticipates policy changes on trade and immigration under President-elect Donald Trump, who is expected to take office in 10 days' time.

On Jan. 15, investors will closely watch the release of the monthly consumer price index, which could spark further volatility if it comes in higher than expectations.

"Markets would sell off meaningfully because all of a sudden the Fed is probably in a position not just to not cut rates and support markets, but to actually hike rates," said Bryant VanCronkhite, senior portfolio manager at Allspring.

Chip stocks such as Nvidia NVDA.O dropped, weighed down by a report that the U.S. could announce new export regulations as early as Friday.

Constellation Energy CEG.O soared after agreeing to buy privately held natural gas and geothermal company Calpine Corp for $16.4 billion, while Constellation Brands STZ.N slid after cutting its annual sales and profit forecasts.

Walgreens Boots Alliance WBA.O jumped after reporting an upbeat quarterly profit.

(Reporting by Johann M Cherian and Sukriti Gupta in Bengaluru, and Carolina Mandl, in New York; Editing by Maju Samuel)

((johann.mcherian@thomsonreuters.com;))