U.S. government bonds and stocks sold off after employment data showed scorching labor conditions, leading traders to bolster expectations for Federal Reserve interest rate hikes.
Treasury yields rose after the closely watched US jobs report showed employers added 528,000 jobs in Julymore than double the 250,000 expected by economists and up sharply from 398,000 in June.
The two-year Treasury yield, which is sensitive to monetary policy expectations, jumped more than 0.2 percentage points to 3.27%, a jump for a market that typically moves in small increments. . Longer-term bonds came under more moderate pressure.
Meanwhile, the S&P 500 was down 0.4% in the afternoon as traders worried about the prospect of further hawkish rate hikes against the fed. The tech-heavy Nasdaq Composite, whose components are particularly sensitive to interest rates, fell 0.8%. Both indices had recouped some early-day losses.
“The narrative is going to be that it’s too hot, the Fed is right and the markets are wrong,” said Jim Paulsen, chief investment strategist at Leuthold Group. “I think it’s a muted response . . . in the stock and bond market relative to the emotion generated by the headlines.
The jobs data capped a week in which market participants boosted expectations of monetary policy tightening in the United States after remarks from several Fed officials.
San Francisco Fed President Mary Daly said the central bank was “far” does with its struggle to cool inflation, which continues to run to 40-year highs. Chicago Fed President Charles Evans said he thought a 0.5 percentage point hike at the next policy meeting in September would be appropriate. However, he left the door open for a bigger increase of 0.75 percentage points, which he said “could also be fine”.
Trading in federal funds futures on Friday showed markets expect the Fed’s main interest rate to peak at 3.64% in March 2023, from 3.46% before the release of the Fed. employment report. The federal funds rate is currently in a range of 2.25-2.50%.
Strong jobs data, which also showed the jobless rate slipping back to a half-century low, helped ease some fears that the world’s largest economy was heading into a recession. It could also give the Fed momentum to continue its rapid rate hikes, after pushing borrowing costs up 0.75 percentage points in June and July.
“The unexpected acceleration in nonfarm payroll growth in July, along with the continued decline in the unemployment rate and the resumption of wage pressure, make a mockery of claims that the economy is on the brink of collapse. recession,” Michael said. Pearce, an economist at Capital Economics, who added that “all the details [of the report] appear to support continued aggressive rate hikes by the Fed.”
However, the effect of the jobs report on the Treasury market has exacerbated the extent to which yields on two-year Treasuries exceed those on the 10-year note. This so-called inversion of the yield curve is generally considered an indicator of an impending economic contraction. According to the data, the spread between yields was at its inverted maximum since August 2000.
The US dollar followed Treasury yields higher on Friday, with an index trailing the currency against half a dozen peers up 0.8%. The pound and euro each fell about 0.6%, while the Japanese yen fell about 1.7%.
In equities, European stocks fell, with the regional Stoxx 600 closing down 0.8%. Asian stocks gained, with Hong Kong’s Hang Seng index up 0.1%.