U.S. government bonds tumbled and stocks tumbled after jobs data showed scorching labor conditions, leading traders to bolster expectations for Reserve interest rate hikes federal.
Treasury yields rose after the closely watched US jobs report showed employers added 528,000 jobs in July, more than double the 250,000 expected by economists and up sharply compared to 398,000 in June.
The two-year Treasury yield, which is sensitive to monetary policy expectations, jumped 0.21 percentage points to 3.25%, a jump for a market that typically moves in small increments. Longer-term bonds came under more moderate pressure.
The S&P 500 stock index closed down 0.2% as traders weighed the prospect of further hawkish rate hikes from the Fed. The tech-heavy Nasdaq Composite, whose components are particularly sensitive to interest rates, fell 0.5%. Both indexes had recovered from declines of more than 1% earlier in the day.
For the week, the S&P 500 gained 0.4%, while the Nasdaq gained 2.2%. This is the first time since the beginning of April that the two indexes have posted three consecutive weekly gains.
“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.
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 prompt the Fed to continue its rapid rate hikes, after pushing borrowing costs up 0.75 percentage points in June and July.
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%.
Market participants had already begun to bolster expectations of monetary policy tightening in the United States after remarks earlier this week from several Fed officials.
San Francisco Fed President Mary Daly said the central bank was “far from” over its fight against inflation, which continues to hit 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”.
The jobs report served as a “reminder that you can’t just look at the GDP report to see if the economy is in a recession,” said Gargi Chaudhuri, head of iShares Americas investment strategy at BlackRock. . “You have to look at a whole range of data, including the labor market.”
The report’s effect on the Treasury market exacerbated the extent to which yields on two-year Treasury bills 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 fell 0.7%, the euro 0.6% and the Japanese yen 1.6%.
In equities, European stocks fell, with the regional Stoxx 600 closing down 0.8%. Asian equities advanced, with Hong Kong’s Hang Seng Index edged up 0.1%.