U.S. stocks closed lower on Wednesday, reversing a positive open, as investors weighed higher bond yields and oil prices ahead of Friday's important jobs report. ( Tweet This )
"Some of the smart money players are hedging their bets for a weaker-than-expected employment report," said Lance Roberts, general partner at STA Wealth Management.
Ahead of the Bureau of Labor Statistics data, the ADP Employment Report showed 169,000 jobs were created in April, below analyst expectations of a modest rise to 200,000.
"In the poor labor report and the generally downbeat earnings and economic reports for the first quarter, investors aren't as sure," said Bruce McCain, chief investment strategist at Key Private Bank. "They're not pulling out but just pausing."
In other economic news, unit labor costs for the first quarter rose 5 percent but productivity fell 1.9 percent, a touch more than the expected 1.8 percent decline. The report is central to the Federal Reserve's assessment of underlying price pressures.
"That's not a good combination—productivity low and unit labor costs high," said Peter Cardillo, chief market economist at Rockwell Global Capital. That could "increase inflation down the road."
U.S. equities followed European stocks lower on currency and bond market moves. The U.S. dollar traded more than 1 percent lower against major world currencies, with the euro topping $1.13 for the first time since the end of February
"The focus is waiting for the employment numbers, where global markets are trading, and the impact on stocks and bonds given valuations," said David O'Malley, CEO of Penn Mutual Asset Management. Yellen is "really raising those questions that valuations are pretty full. I agree with that."
Fed Chair Janet Yellen said on Wednesday morning in a conversation with IMF Managing Director Christine Lagarde that equity valuations are generally quite high.
"More volatility is the order of the day," said Michael Baele, managing director for private client research at U.S. Bank. "The futures did look pretty good. Yellen's comments probably had a pretty good impact."
Stocks sold off sharply following Yellen's remarks and continued to hold lower.
In the afternoon, Atlanta Federal Reserve bank president Dennis Lockhart said he is hopeful growth will pick up but needs more evidence, particularly from consumer spending.
The Dow Jones industrial average recovered losses after falling nearly 200 points to briefly fall into negative territory for the year. Earlier, the index opened up more than 85 points. All the major indices turned negative after a positive open. The S&P 500 recouped losses to close at 2,080, after falling past its April 30 lows of around 2,079.
The Nasdaq also declined, briefly falling 1 percent.
"Today we're seeing some anxiety over whether or not job growth will rebound in April," said Ben Garber, capital markets economist at Moody's Analytics. "Janet Yellen's warnings on valuation were not productive in terms of spurring confidence in the market."
However, traders and analysts noted that the selloff in the bond market had a greater impact than the Fed speakers.
"I think people should learn not to listen to (Yellen) on certain things. one of these things is stock valuations. While I think she's right, her commenting on stock valuations doesn't mean anything. She's not going to react to them with policy," said Peter Boockvar, chief market analyst at The Lindsey Group.
Earlier, he said that "it's all about bonds today, rising interest rates, rising commodity prices,"
Longer-term U.S. Treasury yields recovered morning losses to trade higher. The German 10-year bund yield advanced to near 0.59 percent.
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Yields on the 10-year U.S. Treasury hit a high of 2.25 percent on Wednesday, with the 30-year yield at 2.99 percent.
"I think it's a matter of concern if they move too high too fast," said Stephen Freedman, CIO head of U.S. thematic and sustainable investing strategy at UBS Wealth Management Americas. "But the adjustment right now is not something I would consider a problem."
He expects the 10-year yield to rise to 2.4 percent in the next 12 months.