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Update: US stocks, bonds routed as investors steel themselves for Fed rate hikes

U.S. stocks tumbled and bonds sold off after strong jobs data increased the likelihood that inflation would return and investors contemplated a scenario where more rate hikes from the Federal Reserve would put a crimp in an equities bull market.

The S&P 500 Index closed down 2.12% to 2,762.13 on Feb. 2, with the index down the most in a week since 2016. The benchmark 10-year Treasury rose almost five basis points to 2.841%. Bond yields rise as prices fall.

The dollar continued to rally, on a stronger-than-expected employment report of 200,000 jobs added in January. The euro was down 0.36% to 1.2462.

In addition to jobs, wage increases caught the attention of market participants trying to gauge how soon — and how many times — the Fed is likely to raise rates this year.

"The U.S. labor market has now generated payroll increases for a record 88 consecutive months, and average hourly earnings rose at the fastest annual rate since April 2009," said Ward McCarthy, chief financial economist at Jefferies, in a research note.

The diffusion index, which measures the breadth of job growth, "indicates that 63% of industries added jobs in January, compared to 52% a year ago," Wells Fargo Chief Economist John Silvia wrote in a research note. He projected that growth would be in the 2.5% to 3% range in the first half of this year.

Silvia also said markets could expect a rate hike in March, with another likely in the second quarter of 2018, though Beth Ann Bovino, S&P Global Ratings chief economist, wrote in a note that wage pressure and economic growth increased the chance of four rate hikes this year.

Though there was some good news from earnings reports after market close Feb. 1 — Amazon.com Inc. posted $1 billion in quarterly earnings — there were also disappointments from leading technology companies. After Apple Inc. said iPhone sales did not do as well as expected, its stock closed down 4.34%. Google parent Alphabet Inc. reported disappointing earnings and its stock closed down 4.78%.

The DAX earlier led European markets lower, with the German benchmark index closing down 1.68%, following a third consecutive annual net loss posted by Deutsche Bank AG.

The FTSE 100 saw its worst week since November 2016 after slipping 0.63%. Europe's Stoxx 600 fell 1.38%.