Strong economic data pushes Treasury yields higher as equity markets struggle
Summary
Economic data last week showed signs of strength. While typically a positive signal for markets, stronger than expected readings around U.S. employment figures pushed longer-dated U.S. Treasury yields higher and likely prompted the Fed to remain on hold through the first half of the year. As the 10-year Treasury continues its upward trend closing the week at 4.77%, equity markets have taken notice, with the S&P 500 slipping into negative territory for the year.
Jobs
When the Fed lowered rates by 50 bps in September, they cited the softening in the job market as part of the rationale. Additionally, Chair Powell has consistently stated that the Federal Open Market Committee (FOMC) does not believe that labor markets would be a driver of higher inflation moving forward. That rationale was called into question last week, as three key employment indicators all pointed to signs of a labor market that is heating up, not cooling.
Last week began with the Job Openings and Labor Turnover Survey (JOLTS) showing almost 8.1M job openings, higher than consensus estimates of 7.7M. That was followed by lower than expected jobless claims of just 201,000 and a much hotter than expected U.S. jobs report number that showed payrolls grew by 256,000, sending the unemployment rate down slightly to 4.1%. When taking a closer look at the jobs report, job growth continued within the health care (+46,000) and government (+33,000) sectors. Retail also saw an increase (+43,000) after losing 29,000 jobs in November. Whether some of these job gains will be revised in the coming months, bond markets have certainly reacted to the news.
The odds of the next rate cut moved to June 2025, and the 10-year Treasury continued its upward trend, influenced by the probabilities of fewer rate cuts and concerns over tariffs, fiscal deficits, and inflation. The rise in rates extend beyond the U.S., as U.K. government bonds also saw a significant uptick over the week with the 10-year gilt rising to 4.925% last Thursday, its highest level since 2008.
Oil
Although the news surrounding jobs dominated the headlines, investors should pay close attention to oil prices, which have been trending higher as of late. Over the past month, oil prices have risen by approximately 9%. This was a trend that started to take hold prior to last week, however, it was accelerated last Friday with news that the U.S. will place additional sanctions on Russia and Venezuela. Oil prices have has risen despite weak global growth, leaving room for further increases if China’s economy recovers. Higher oil prices would challenge the Fed (although, they don’t necessarily focus on headline inflation) and U.S. consumers as they are unlikely to get relief from lower financing costs with interest rates staying higher. Although the U.S. consumer has shown resilience, oil prices and inflation, higher interest rates, and slower wage growth could present challenges moving forward.
Source: New York Mercantile Exchange (NYMEX)
Other key economic releases
There were a number of other U.S. economic released last week. The final U.S. PMI release showed a composite index reading of 55.4 and a services index reading of 56.8, slightly lower than the flash readings and expectations but higher than prior month readings. The ISM Services Index was higher than expected at 54.1.
The ADP employment report showed the U.S. added 122,000 jobs, below expectations of 134,000. Consumer sentiment fell to 73.2 from 74, while year-ahead inflation expectations jumped to 3.3%, up from 2.8%. There were also a number of international releases, which generally continued to show signs of weakness, especially in the Eurozone. China also released CPI and PPI numbers, showing deflationary pressures.
The week ahead
This week brings several critical economic data releases, including CPI and PPI, retail sales, and housing starts.
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