The stock market moved lower on Friday morning, and the biggest impact came from the release of the latest government report on the employment situation. Coming out at 8:30 a.m. ET, the report led to an immediate decline in stock market futures before the beginning of the regular trading session. When markets opened, major market benchmarks dropped as much as 1.5% in the first half hour of trading.

Based on the reaction from the markets, it would be reasonable for investors to assume that there was some sort of bad news in the jobs report. Yet one thing that market participants have to come to grips with is that sometimes what sounds like good news can have a negative impact on the stock market. That's what happened Friday morning, and it shows that most investors are focused on what the Federal Reserve is likely to do with interest rate policy in the coming months.

The report gave good news on jobs ...

Early Friday, the Bureau of Labor Statistics released its employment situation report for the month of November. The headline numbers showed greater strength in the labor market than most economists had anticipated. The U.S. economy generated 263,000 new nonfarm jobs during November. The unemployment rate, meanwhile, stayed at 3.7%, unchanged from its level in October.

Person wearing hard hat is doing work on a piece of equipment.

Image source: Getty Images.

Looking more closely at the numbers, the leisure and hospitality industry created the most jobs within the U.S. economy, with 62,000 of those 88,000 new jobs specifically in the food services and drinking establishment area. Healthcare employment levels rose by 45,000 jobs for the month, while there were 42,000 new government jobs, most of which came at the local government level.

There were a few pockets of weakness, however. Retail trade jobs fell by 30,000 in November, led by a 32,000 job decline in general merchandise retailers. Job losses of 15,000 hit the transportation and warehousing industry as well, continuing declines seen since early summer.

... but raised new concerns about inflation

The employment report also measures wages, and the November numbers showed continued rises in worker pay. Average hourly earnings for all employees were up $0.18 to $32.82. That 0.6% monthly rise contributed to a 5.1% rise over the past 12 months.

Wage increases are good for workers, especially in light of higher prices they've had to pay for goods and services due to inflation over the past year. However, in setting monetary policy, the Federal Reserve sees excessive wage growth as a threat to price stability, and that explains much of the negative move in financial markets in response to the report.

The biggest impact of the report was evident in the bond market. Yields on the 10-year Treasury note rose by a 10th of a percentage point, moving back above the 3.6% mark. The 30-year bond saw a similar spike higher, and short-term Treasury securities saw even larger yield increases from the inflation threat. Those moves reflect an increased likelihood that the Fed will have to maintain its federal funds rate at levels that will restrict economic activity for a longer period of time than previously hoped.

Stocks did move lower, but the relatively modest size of the downward move was more noteworthy than the decline itself. By comparison, markets fell much more sharply on Nov. 2, when the Fed made its most recent increase of three-quarter percentage points in short-term interest rates. That move came after a Fed statement that supported a tough stance on inflation, and investors might have expected that a strong employment report would spur the same kind of concerns about the central bank's likely response.

Still, technology stocks were the worst performers among sectors of the market, once again remaining sensitive to fears about interest rates. Other rate-sensitive areas like utilities and real estate were also notably weaker than more defensive areas like consumer staples.

Taking news in stride

It's encouraging that stock market investors aren't in a panic over the latest job report numbers. In the long run, the Fed and investors are on the same side, as controlled inflation will be a long-term positive for stocks. In that light, even if a hawkish stance on rates causes short-term difficulties, the end result could be more favorable for investors.