US treasuries sink as jobs fuel rate-hike bets

Treasuries sank after data showed a booming labor market that might prompt the Federal Reserve to raise rates sharply at its next meeting.

The two-year Treasury yield jumped towards 3.2 per cent while the 10-year rate pushed past 2.80 per cent after employers added 528,000 jobs last month, more than double what economists expected. Wage growth also came in stronger than anticipated.

The S&P 500 wavered after dropping as much as 1 per cent, as investors speculated the threat of recession has receded enough that corporate earnings can remain robust. Rate-sensitive sectors such as big tech retreated, though also traded well off session lows.

“We believe this development signals the end of the recent bear market rally” said John Lynch, chief investment officer at Comerica Wealth Management. “A primary driver of the recent move higher was that investors hoped the Fed would be less aggressive going forward, which propelled growth and technology higher.”

The strong jobs report validates the Fed’s view of a resilient economy that can withstand additional interest-rate hikes. Traders have now recalibrated expectations for Fed policy, with a hike of three-quarters of a percentage point the more likely scenario at the September meeting as the central bank battles inflation.

A handful of Fed officials this week reiterated the central bank’s resolve to bring down high prices. Among them is Fed St Louis President James Bullard, who has said he favors a strategy of front-loading big interest-rate hikes. That stance has likely strengthened after Friday’s job report, ruling out the possibility of a dovish pivot that Fed Chair Jerome Powell hinted at last week.

“This jobs report is consistent with an inflationary boom,” said Neil Dutta, head of economics at Renaissance Macro Research. “The Fed has a lot more work to do and in an odd way, that the Fed needs to get more aggressive in pushing up rates, makes the hard-landing scenario more likely.”

Here’s what else Wall Street is saying about the jobs surprise:

  • Win Thin, global head of currency strategy at Brown Brothers Harriman & Co:
    • “Odds of a 75 basis point move next month have shot up, as they should. We still get one more jobs report before the September FOMC but barring a disaster, I think 75 bp then is a done deal.”
  • Eric Theoret, global macro strategist at Manulife Investment Management:
    • “For the Fed, this report confirms the need to continue tightening and also endorses much of this week’s Fedspeak that sought to jawbone rate expectations. For markets, the report may pose a challenge for rate-sensitive equities like tech which had recently been leading in terms of sector performance.
  • Seema Shah, chief strategist at Principal Global Investors:
    • “All the jobs lost during the pandemic have now been regained. But while that is positive news, markets will take today’s number as a timely reminder that there is significantly more Fed hiking still to come. Rates are going above 4 per cent — today’s number should put to bed any doubters.”
  • Peter Boockvar, chief investment officer at Bleakley Financial Group:
    • “This was a great number with the obvious big upside in hirings but when this is happening at the same time GDP is declining, it means productivity is plunging. Also, as the pace of firing is at the highest level in nine months, this pace of hiring is just not sustainable.”

Despite being the focus of the day for traders, the jobs report supposedly has little value for those trying to predict a recession because it’s backward-looking.

Corporate earnings, combined with thin liquidity that’s common in the summer, took the stock market on a ride this week. Many firms beat expectations and proved they could handle high inflation and a gloomy economic outlook. But investors have resumed shunning global stocks in favor of bonds, according to Bank of America Corp. strategists, who say it’s time to step back from US equities after July’s rally.

US-China tension also remains among the uncertainties clouding the outlook. China announced it would halt cooperation with the US in a number of areas — including working-level talks on climate change and defense — after US House Speaker Nancy Pelosi’s trip to Taiwan this week. China also sent warships across the Taiwan Strait’s median line in the first such incursion in years, a day after likely firing missiles over the island.

West Texas Intermediate stayed below US$90 a barrel. Gold fell and Bitcoin gained.

Some of the main moves in markets:

Stocks

  • The S&P 500 fell 0.1 per cent as of 10:26 am New York time
  • The Nasdaq 100 fell 0.3 percent
  • The Dow Jones Industrial Average was little changed
  • The Stoxx Europe 600 fell 0.5 per cent
  • The MSCI World index rose 0.3 percent

Currencies

  • The Bloomberg Dollar Spot Index rose 0.7 percent
  • The euro fell 0.7 percent to US$1.0177
  • The British pound fell 0.8 percent to US$1.2063
  • The Japanese yen fell 1.8 per cent to 135.33 per dollar

Bonds

  • The yield on 10-year Treasuries advanced 15 basis points to 2.84 per cent
  • Germany’s 10-year yield advanced 13 basis points to 0.94 per cent
  • Britain’s 10-year yield advanced 15 basis points to 2.04 per cent

Commodities

  • West Texas Intermediate crude rose 1.3 per cent to US$89.73 a barrel
  • Gold futures fell 0.7 per cent to US$1,794 an ounce

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