February 6, 2023

US government bonds fall after hot jobs report

US government bonds fall after hot jobs report

US government bonds tumbled and stocks tumbled after employment data showed hot business conditions, prompting traders to boost their expectations for a Federal Reserve rate hike.

Treasury yields rose after a closely watched US jobs report showed employers added 528,000 jobs in Julymore than double the 250,000 that economists had expected and up sharply from 398,000 in June.

The two-year Treasury yield, which is influenced by monetary policy expectations, rose 0.21 percentage point to 3.25 percent — a sharp jump for a market that usually moves in small increments. Long-term bonds have come under more subdued pressure.

The S&P 500 stock index closed 0.2 percent lower as traders weighed the prospect of tighter rate hikes than feed it. The high-tech Nasdaq Composite, whose components are particularly sensitive to interest rates, fell 0.5 percent. Both indices recovered from declines of more than 1 percent earlier in the day.

Over the course of the week, the S&P 500 rose 0.4 percent, while the Nasdaq added 2.2 percent. This is the first time since the beginning of April that both indices have combined three consecutive weekly gains.

“The narrative would be that it got really hot, the Federal Reserve was right, and the markets were wrong,” said Jim Poulsen, chief investment analyst at The Leuthold Group. “I think it’s a muted response…in the stock and bond market to the emotion generated by the headline numbers.”

Strong jobs data, which also showed the unemployment rate returned to its lowest level in half a century, helped calm some fears that the world’s largest economy could be headed into a recession. It could also give the Fed an impetus to continue its rapid increases in interest rates, after it pushed borrowing costs up 0.75 percentage points in June and July.

Trading in federal fund futures on Friday showed that markets expect the Fed’s key interest rate to peak at 3.64 percent in March 2023, up from 3.46 percent before the jobs report was released. The federal funds rate is currently in a range of 2.25 to 2.50 percent.

Market participants have already begun boosting expectations for a tightening of monetary policy in the United States after statements earlier this week from several Federal Reserve officials.

Mary Daly, president of the Federal Reserve Bank of San Francisco, said the central bank was “Not close at all“With its battle to cool inflation, which continues to climb to 40-year highs. Chicago Fed President Charles Evans said he believes a 0.5 percentage point increase at the next policy meeting in September would be appropriate. However, he left the door open In front of a bigger rise of 0.75 percentage point, which he said “could be good too”.

Gargi Choudhury, head of iShares Americas investment strategy at BlackRock, said the jobs report was a “reminder that you can’t just look at the GDP report to see if the economy is in a recession.” “You have to look at a whole bunch of data, including from the labor market.”

The report’s impact on the treasury market exacerbated the extent to which yields on two-year Treasuries outstrip those on ten-year notes. A so-called yield curve inversion is usually seen as an indication of an impending economic downturn. After the data, the difference between yields has been at its most reversible since August 2000.

The US dollar followed higher Treasury yields on Friday, with an index that tracks the currency up against six of its peers by 0.8 percent. The pound fell 0.7 percent, the euro 0.6 percent, and the Japanese yen 1.6 percent.

On the equity front, European shares slid, with the regional Stoxx 600 Index closing 0.8 percent lower. Asian stocks gained, with Hong Kong’s Hang Seng Index rising 0.1 percent.