Rally In U.S. Treasury Yields Pull Markets Lower

Wall Street fell sharply lower on Thursday, as Treasury yields hit the highest level since 2011. Rapidly rising Treasury yields are dampening appetite for stocks, stoking fears that higher rates will hold back growth. Another round of impressive data from the US fanned concerns over inflation and the potential for a steeper path of tightening from the Fed. In particular, dividend-paying stocks, which are sensitive to interest rate rises, were broadly lower, whilst banking stocks, which benefit from higher rates, rallied.

This is not the first time we have seen yields surge this year and drag equities lower. However, the move is even more convincing this time around as the run-up of strong data has been longer and the data even more impressive. Even the Fed is stoking yields higher with its commentary. The US economy is on fire right now and the bond market has been underestimating just how hot the economy is. What we are seeing here is that complacency is starting to fade.

Asian markets traded lower taking the lead from the US, however, Europe looks to be bucking the trend with a positive start on the cards. The only data release for the UK will be Halifax housing prices, which are expected to show a decline over the 3 months to September but a tick higher on a monthly basis.

Why the NFP could drag US stocks lower?

It is that time of the month again and the US jobs report is more hotly anticipated than usual. US Treasury yields hover around 7-year highs and the dollar is close to a six-week high heading into the NFP. 184,000 US jobs are expected to have been created in September, down on August’s impressive 201,000. As with more recent non-farm payrolls, a lot of attention will be focused on wage data. Earnings are expected to have crept northwards, increasing 0.3% month on month, whilst the unemployment rate is forecast to have dipped to 3.8% from 3.9%.

Indicators are pointing towards a possible surprise to the upside after ADP private payroll data smashed expectations earlier in the week, as did the non-manufacturing index. The idea of a 500k jobs number is being thrown around that would almost certainly cause some fireworks. A continued tightening of the labour market and a healthy increase in earnings will increase the possibility of a faster path of policy tightening from the Fed. This is particularly relevant in light of Fed Chair Jerome Powell’s comment earlier in the week. A strong reading today would be further evidence of Powell’s almost too good to be true economy.

Given the high expectations surrounding today’s release after a week of exceptional data, the figures will need to be solid to provide the dollar bulls fresh fodder to move higher on. A strong reading should push Treasury yields higher, lifting the dollar but dragging stocks even lower; exasperating fears of faster than expected interest rate rises dampening growth.

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Original post

Written By: London Capital Group