US government bonds and stocks sold off after employment data showed red-hot labor conditions, prompting traders to raise their expectations for interest rate hikes from the Federal Reserve.
Treasury yields soared after the closely watched US jobs report showed employers added 528,000 jobs in Julymore than double the 250,000 expected by economists and a sharp increase from 398,000 in June.
The two-year Treasury yield, which is sensitive to monetary policy expectations, rose more than 0.2 percentage point to 3.27 percent, a sharp jump for a market that normally moves in small increments. Longer-dated bonds came under more moderate pressure.
Meanwhile, the S&P 500 fell 0.4 percent in the afternoon as traders worried about the prospect of further hawkish rate hikes from the fed. The tech-heavy Nasdaq Composite, whose components are particularly sensitive to interest rates, fell 0.8 percent. Both indices had recovered some losses from earlier in the day.
“The narrative is going to be that it’s gotten 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 market relative to the excitement generated by the headline numbers.”
The employment data caps a week in which market participants boosted expectations for tighter monetary policy in the US after comments from several Fed officials.
San Francisco Fed President Mary Daly said the central bank was “nowhere near” done with his fight to cool inflation, which continues at 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 larger increase of 0.75 percentage points, which he said “could also be fine.”
Fed funds futures trading on Friday showed that markets expect the Fed’s prime rate to peak at 3.64 percent in March 2023, down from 3.46 percent before the report’s release. of employment. The fed funds rate is currently in a range of 2.25-2.50 percent.
Strong jobs data, which also showed the jobless rate returning to a half-century low, helped allay some concerns that the world’s largest economy may be headed for a recession. It could also prompt the Fed to continue its rapid rate hikes, after it raised borrowing costs by 0.75 percentage point in June and July.
“The unexpected acceleration in nonfarm payroll growth in July, coupled with the further decline in the unemployment rate and renewed pick-up in wage pressure, make a mockery of claims that the economy is on the verge of recession. Michael said. Pearce, an economist at Capital Economics, who added that “all the details [of the report] seem to support continued aggressive rate hikes by the Fed.”
However, the effect of the jobs report on the Treasury market exacerbated the extent to which two-year Treasury yields outperform those on the 10-year note. This alleged yield curve inversion is often seen as an indicator of an impending economic downturn. According to the data, the spread between the yields reversed the most since August 2000.
The US dollar followed Treasury yields higher on Friday, with an index tracking the currency against half a dozen peers rising 0.8 percent. The pound and the euro fell 0.6 percent each, while the Japanese yen fell 1.7 percent.
In equities, European stocks fell, with the regional Stoxx 600 closing down 0.8 percent. Asian stocks gained, with Hong Kong’s Hang Seng Index rising 0.1 percent.