US Treasuries plunged and equities fell after employment data showed glowing working conditions, prompting traders to boost expectations for Federal Reserve rate hikes.
Treasury yields skyrocketed after the closely-watched US jobs report showed that employers had added 528,000 jobs in July, more than double the 250,000 economists had expected and a sharp increase from 398,000 in June.
Two-year government bond yields, which are sensitive to monetary policy expectations, rose 0.21 percentage point to 3.25 percent — a significant jump for a market that typically moves in small increments. Longer-term bonds came under more pressure.
The S&P 500 stock index closed 0.2 percent lower as traders weighed the prospect of further aggressive Fed rate hikes. The technology-heavy Nasdaq Composite, whose components are particularly interest-rate sensitive, fell 0.5 percent. Both indices had recovered from a decline of more than 1 percent earlier in the day.
For the week, the S&P 500 gained 0.4 percent, while the Nasdaq gained 2.2 percent. It is the first time since early April that both indices have strung three consecutive weekly gains.
“The story will be that it came in way too hot, the Fed is right and the markets were wrong,” said Jim Paulsen, chief investment strategist at The Leuthold Group. “I think it’s a muted response. . . in the stock and bond markets relative to the emotion generated by the headlines.”
Strong jobs data, which also showed the unemployment rate returning to a half-century low, helped allay some concerns that the world’s largest economy is headed for recession. It could also give the Fed an incentive to continue its rapid rate hikes after pushing borrowing costs by 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, down from 3.46 percent before the release of the jobs report. The Federal Funds interest rate is currently in a range of 2.25-2.50 percent.
Market participants had already begun to raise expectations for tighter monetary policy in the US following comments from several Fed officials earlier this week.
Mary Daly, president of the San Francisco Fed, said the central bank was “far from done” with its battle to cool inflation, which is still at a 40-year high. Chicago Fed President Charles Evans said he sees a 0.5 percentage point increase at the next policy meeting in September appropriate. However, he left the door open for a larger 0.75 percentage point increase, which he said “could also be good”.
The jobs report served as “a reminder that you can’t just look at the GDP report to see if the economy is in recession,” said Gargi Chaudhuri, head of iShares Investment Strategy Americas at BlackRock. “You have to look at a lot of data, also from the labor market.”
The report’s effect on the Treasury market exacerbated the extent to which yields on two-year Treasuries exceeded those on the 10-year bond. This so-called yield curve inversion is generally regarded as an indicator of an impending economic contraction. According to the data, the spread between yields was the most inverted since August 2000.
The US dollar followed higher government bond yields on Friday, with an index tracking the currency against half a dozen peers, up 0.8 percent. The pound fell 0.7 percent, the euro 0.6 percent and the Japanese yen 1.6 percent.
In equities, European equities fell and the regional Stoxx 600 closed 0.8 percent lower. Asian stocks gained, while the Hang Seng index in Hong Kong rose 0.1 percent.
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