Stocks Decline and Yields Surge as US Jobs Data Points to Potential Rate Hikes

04 Oct, 2023

Stocks Decline and Yields Surge as US Jobs Data Points to Potential Rate Hikes

Global equities experienced a decline on Tuesday, primarily due to a significant surge in Treasury yields following a stronger-than-expected rise in U.S. job openings during August. This development further indicates the resilience of the U.S. economy, potentially leading the Federal Reserve to maintain higher interest rates for an extended period.

Initially, the dollar strengthened but later exhibited a sharp decline against the yen, breaching the key 150 level for the first time since October 2022. This abrupt movement raised suspicions of Japanese monetary officials possibly intervening to stabilize the yen's depreciation. However, Japan's finance ministry remained unresponsive to requests for comments, leaving the market uncertain.

Michael Brown, a market analyst at Trader X in London, remarked, "It has all the hallmarks of intervention in all honesty," while others in the market disagreed, attributing the breach to the robust Job Openings and Labor Turnover Survey (JOLTS) report for August. The report ended a streak of three consecutive monthly declines, highlighting that employers retained their workforce in August.

Ronald Temple, Lazard's chief market strategist based in New York, remarked, "The United States' economic resilience remains a pleasant surprise," and he further suggested, "While it appears that the Federal Reserve's interest rate increase phase has concluded, there remains a potential need for an additional hike in response to data such as today's."

The yield on the 10-year Treasury note surged by over 12 basis points, reaching 4.806%, marking its highest yield since August 2007. The dollar depreciated by 0.71% to 149.165 yen and hovered near stability against the euro, with the dollar index showing minimal change at 106.97.

Major U.S. and European stock indices declined by more than 1%, with MSCI's global stocks gauge falling by 1.49%, and the pan-European STOXX 600 index closing down by 1.1%. On Wall Street, the Dow Jones Industrial Average decreased by 1.43%, the S&P 500 lost 1.53%, and the Nasdaq Composite dropped by 2.06%.

Despite rising bond yields, there is no clear evidence that they are significantly slowing the U.S. economy beyond what is typically expected in a tightening cycle. Atlanta Fed President Raphael Bostic joined several colleagues in downplaying the market-driven increase in borrowing costs, stating that long-term yield jumps have not yet had a substantial impact on policy.

Analysts anticipate that bonds, which move inversely to yields, will remain weak until there are visible signs of higher borrowing costs adversely affecting the economy.

The yen faced particular pressure due to the dollar's ascent to a 10-month high and the rise in Treasury yields, primarily driven by the substantial gap between U.S. and Japanese interest rates. Japan's monetary authorities have maintained a policy of keeping borrowing rates exceptionally low, reducing the appeal of owning the country's currency or bonds.

The 10-year Treasury's yield now holds its largest premium over its Japanese counterparts since last November, at nearly 400 basis points. Traders are attributing a 27.7% likelihood of another U.S. rate hike in November and a 46.3% chance of an increase by December, according to CME Group's FedWatch Tool. Futures contracts indicate that the Fed's lending rate is expected to remain above 5% through September 2024.

Japanese Finance Minister Shunichi Suzuki emphasized that authorities were closely monitoring the currency market and were prepared to respond, reiterating warnings against speculative moves that did not align with economic fundamentals. Suzuki had emphasized the "high" or "strong" "sense of urgency" related to monitoring the yen seven times in the past week.

Oil prices rebounded after hitting a three-week low, with investors weighing factors such as a stronger dollar, uncertain global economic signals, and tightening supply. U.S. crude futures rose by 41 cents to settle at $89.23 a barrel, while Brent settled up by 21 cents at $90.92.

Gold prices remained near a seven-month low, pressured by a robust dollar and elevated bond yields, reflecting the prevailing sentiment that U.S. interest rates would remain at higher levels for an extended period. U.S. gold futures settled 0.3% lower at $1,841.50 per ounce.