07 Oct, 2023
A robust US jobs report released on Friday had a significant impact on various financial markets. The data not only propelled the dollar higher but also cast a shadow over stocks and bonds, raising concerns that interest rates might remain elevated for an extended period and triggering discussions about the post-pandemic economy entering a new era.
According to the Department of Labor, nonfarm payrolls surged by 336,000 jobs last month. Furthermore, the data for August underwent a positive revision, indicating that 227,000 jobs were added instead of the previously reported 187,000. This September figure nearly doubled the economists' forecast of 170,000, leaving the markets astounded. Investors grappled with questions regarding whether the stronger-than-expected economy was genuinely slowing down and what measures might be necessary to curb inflation.
Marvin Loh, senior global macro strategist at State Street in Boston, commented on the situation, stating, "The markets have been reacting to their view that the Fed is as confused as we are." He further speculated, "Maybe the economy has structurally changed to the point where real yields need to be higher than what they were in the five years before the pandemic."
The yield on the benchmark 10-year Treasury note surged by more than 13 basis points within half an hour after the report's release, reaching a new 16-year high of 4.8874 percent. This added to the month's steep sell-off. It's essential to note that bond yields move inversely to price.
Futures traders raised the probability of the Federal Reserve hiking rates in November to 30.7 percent, up from 23.7 percent before the data's release, as indicated by CME Group's FedWatch Tool. The Fed's overnight rate was priced above 5 percent through the following July. Gennadiy Goldberg, head of US rates strategy at TD Securities USA in New York, commented, "We'll see how much tightening the market does for the Fed, but a run at the 5 percent mark in 10-year yields may be inevitable if the data continues to hold up like this."
The dollar index gained 0.29 percent, heading towards a 12-week winning streak after reaching its highest level in nearly 11 months earlier in the week. The yen weakened, edging closer to 150 yen to the dollar, a level that many in the market believe could prompt intervention by Japanese officials. Meanwhile, the euro was on track for a record 12 consecutive weeks of declines against the dollar.
Simon Harvey, head of FX Analysis at Monex Europe, observed that the "monstrous payrolls" figures and the upward revision of the August numbers would support the dollar's continued ascent. He noted, "Given the strength in today's employment figures, markets can't fully discount the probability of a Fed hike in the fourth quarter, even as it coincided with weaker wage data."
In the stock markets, Wall Street saw initial losses across all 11 S&P 500 sectors, which were later mitigated as the Nasdaq moved higher. The strong jobs data also had an impact on European markets, causing stocks to trim their gains.
Amid previous discussions of oil prices hitting $100 a barrel, crude prices slid further, experiencing their steepest weekly decline since March. Traders expressed concerns that persistently high interest rates could impede global economic growth and dampen fuel demand. Additionally, news that Russia was lifting a ban on pipeline diesel exports via ports contributed to lower oil prices.
Eurozone bond yields increased, and the closely-watched gap between German and Italian borrowing costs, an indicator of stress in Italian finances, reached its highest level since March. Global bond funds experienced significant outflows.
MSCI's global stocks gauge edged down by 0.03 percent, while the pan-European STOXX 600 index lost 0.15 percent. In the US, the Dow Jones Industrial Average fell by 0.26 percent, the S&P 500 lost 0.23 percent, and the Nasdaq Composite managed to gain 0.02 percent.
US crude oil prices recently declined by 0.26 percent to $82.10 per barrel, while Brent crude was at $83.94, down 0.15 percent for the day. Finally, spot gold registered a 0.5 percent increase, reaching $1,828.19 an ounce.
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