Rapid reversal in bonds and rise in stocks, unexpected week for the market

Rapid reversal in bonds and rise in stocks, unexpected week for the market

Stocks and bonds rose Friday after a volatile week for investors after fresh data about the health of the U.S. labor market led to a sharp reversal.

The 10-year government bond yield, which underpins rates on everything from mortgages to business loans, fell 0.1 percentage points on Friday, another big drop for a market that has seen daily moves of up to hundredths of a point. Is measured in. Yields move inversely to prices.

A new report showed the U.S. economy added fewer jobs than expected in October, a sign of a cooling labor market that could reduce the need for the Federal Reserve to raise its key rate again as it aims to keep inflation at bay. To fight is to slow down the economy. ,

That helped lift the stock market, which had been sold off by rising rates in recent months. The S&P 500 ended the week up nearly 6 percent, recording its best week of the year.

The Fed began raising its key short-term rate in March last year, but investors have recently become focused on longer-term market rates, which take into account a variety of factors, such as economic growth and inflation expectations, in addition to just the Fed’s policy decisions. Inspired by. , These long-term rates began rising in August, raising concerns about the sustainability of the government’s $33 trillion debt pile, among other concerns.

Those concerns were somewhat alleviated this week. Investors welcomed the Treasury Department’s plans to shift their borrowing toward shorter-term debt, easing pressure on long-term yields. Then, Fed Chairman Jerome H. Powell appeared to calm investor jitters after the central bank kept rates steady for the second consecutive meeting. Weaker-than-expected job growth also suggested the Fed’s efforts to slow the economy were having an impact.

“For me, the jobs report is unquestionably positive,” said Ronald Temple, chief market strategist at Lazard. “I think it’s a really good sign for the Fed that they’re slowing the economy and they don’t need to raise rates again.”

The 10-year Treasury yield fell 0.3 percentage points for the week to just under 4.6 percent, its biggest drop since the banking turmoil in March. Still, yields remain more than half a percentage point higher than in early August.

The fall in yields this week led to a broad rally in stock markets. The Russell 2000 index of smaller companies, which is more sensitive to fluctuations in the economy, rose 2.8 percent on Friday. The index had fallen more than 18 percent in recent months, but rose nearly 8 percent this week, its biggest one-week jump since the recovery from the early pandemic in 2020.

Still, some investors cautioned that the market reaction may not reflect such a rosy story. The unemployment rate rose to 3.9 percent in October from 3.8 percent the previous month, while the number of people working or actively looking for work declined.

“What concerns me is that when we see this increase in the unemployment rate, it’s going to get higher,” said Blerina Urusei, chief U.S. economist at T. Rowe Price. “This is something I am keeping a close eye on. Otherwise, the slowdown in employment appears systematic.”

After the jobs report, investors downgraded the likelihood of the Fed raising interest rates at its next meeting in December, and raised expectations of a rate cut next year, a sign they believe the Fed will keep rates… Has increased and the economy will improve continue to slow.

Mr Powell, the Fed chairman, said on Wednesday that recent increases in long-term interest rates, which also raise borrowing costs and slow the economy, would need to be “persistent” to play a role in convincing policymakers . Increase your prime policy rate again.

But if the recent reversal in the bond market continues and yields continue to fall, the “irony” is that the Fed could become more likely to raise its rates in December, said Mark Dowding, chief investment officer at asset manager BlueBay. Because this will reduce the cost of borrowing and reduce the brakes on the economy.

And while a slowing economy would be expected to push long-term rates lower over time, concerns over who will buy the flood of debt issued by the US government could push rates in the opposite direction.

“There are two opposing forces at work,” said Paul Christopher, head of global investment strategy at Wells Fargo Investment Institute. “There is a slowing economy, which has now become stronger and that will lead to lower yields. But over time, the Treasury will issue more debt and those yields will rise again. We are in a cross-current right now.

Jenna Smialek Contributed to the reporting.

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