US STOCKS-Wall Street retreats as rate cut expectations ease

* U.S. job growth surges, wage growth remains tepid
* Rate-sensitive bank stocks gain
* Dow down 0.22%, S&P 500 down 0.26%, Nasdaq down 0.18%

(Updates to mid-afternoon, changes byline)
By Chuck Mikolajczak
July 5 (Reuters) - U.S. stocks declined on Friday, as the
S&P 500 retreated after closing at a record for three straight
sessions, following an unexpectedly strong U.S. payrolls report
that caused investors to rethink how dovish a turn the Federal
Reserve may take.
The U.S. Labor Department data showed nonfarm payrolls rose
by 224,000 jobs in June, the most in five months, and solidly
beating economists' expectation of 160,000 additions. Traders sharply scaled back their expectations of a rate cut
of half a percentage point by the central bank at its next
policy meeting on July 30-31, although confidence remained high
the Fed would cut rates by 25 basis points. Stocks slumped in May as trade talks between the U.S. and
China were at a standstill and economic data began to point to a
slowing. However, equities have rallied since June as the Fed
and other global central banks signaled they were becoming more
dovish.
"The thing right now is that markets don't feel like we are
in a good spot to get sustained, strong economic data as long as
these tariffs are hanging over the market," said Shawn Cruz,
manager of trader strategy at TD Ameritrade in Jersey City, New
Jersey.
"So really your only hope, at least for the near term, is
that the Fed remains accommodative and maybe even gets a little
bit more accommodative until we get a resolution to a lot of the
tariff and trade issues."
The Dow Jones Industrial Average .DJI fell 59.97 points,
or 0.22%, to 26,906.03, the S&P 500 .SPX lost 7.76 points, or
0.26%, to 2,988.06 and the Nasdaq Composite .IXIC dropped
14.44 points, or 0.18%, to 8,155.79.
Despite Friday's losses, major equity indexes were still on
pace for solid weekly gains.
The jobs report also pointed to persistent moderate wage
gains and mounting evidence that the economy was losing
momentum, which could still give the Fed enough of a cushion to
cut rates at the end of the month.
The Fed, in its semi-annual report to Congress, repeated its
pledge to "act as appropriate" to sustain the economic
expansion, and said while U.S. economic growth continued "at a
solid pace" in the first half of the year it likely weakened in
recent months as higher tariffs weighed. Shares of banks .SPXBK , which have been under pressure
from falling benchmark debt yields in recent weeks, rose 0.70%
and helped drive a 0.32% gain in the financial sector .SPSY ,
one of the few bright spots among S&P sectors.
The defensive names such as real estate .SPLRCR , utilities
.SPLRCU and consumer staples .SPLRCS - each declined as a
rise in U.S. Treasury yields served to make the dividend-paying
companies less attractive.
Trading volumes were light at the end of a holiday-shortened
week as markets were shut on Thursday for the Independence Day
holiday.
Declining issues outnumbered advancing ones on the NYSE by a
1.39-to-1 ratio; on Nasdaq, a 1.01-to-1 ratio favored decliners.
The S&P 500 posted 24 new 52-week highs and no new lows; the
Nasdaq Composite recorded 46 new highs and 36 new lows.