Why the Dow ignored rising Treasury yields after a May jobs report

By William Watts

Major Indices Post Minor Losses Despite Bond Liquidation

A red-hot jobs report Friday sent shivers through the bond market, prompted another reassessment of rate cut expectations and may have spoiled Federal Reserve Chairman Jerome Powell's weekend.

Stock market investors, on the other hand, remained relatively calm, with the S&P 500 SPX and Nasdaq Composite COMP posting slight losses after flirting with record closes. Which give?

“As far as stocks go, from an economic standpoint, it's a good environment to see more jobs being created and wages going up,” and that's good news for corporate profits, said Charlie Ripley, senior investment analyst at Allianz Investment Management, told MarketWatch in a statement. telephone interview.

For those uninitiated in the logic of Wall Street or central banks, a good jobs report would intuitively be interpreted as pure good news. But for investors, hot data can spell trouble if the Federal Reserve is seen as needing to tighten monetary policy — or in this case, keep rates high — in response to inflation.

Treasuries sold off, pushing up yields (which move opposite to price) on Friday. The yield on the 2-year Treasury note BX:TMUBMUSD02Y, the most sensitive to political expectations, jumped 15 basis points to end at 4.87%, while the 10-year Treasury note BX:TMUBMUSD10Y rose by 14.8 basis points to 4.428%.

After an initial hesitation, shares rose during Friday's session but slipped back into losing territory by the closing bell, with the Dow Jones Industrial Average DJIA posting a slight loss of 87.18 points or 0.2%. while the S&P 500 lost 0.1% and the Nasdaq Composite. fell 0.2%.

Stock market today: Dow leads while S&P 500 and Nasdaq erase late morning rise

Rising Treasury yields can disrupt stocks, particularly if the rise is rapid. Higher yields mean higher borrowing costs but, more importantly, can make stocks less attractive compared to bonds as they offer more attractive returns than before.

What's behind the apparent disconnect between Friday's Treasury sell-off and the steady reaction of stock markets? Treasury traders appear to be reacting particularly to the wage data in the jobs report, Ripley said.

Average hourly wages jumped again in May, pushing the increase over the past year to 4.1% from 4%. The Fed wants to see annual wage gains slow to 3% or less to help the central bank return U.S. inflation to its low pre-pandemic norms.

The wage data “really draws attention to the idea that inflation is still here and will be here for some time, despite the Fed's efforts to bring it down,” Ripley said. “This means the Fed’s rate cuts are being pushed back further.”

Fed policymakers will meet next week. Investors don't expect any policy changes at the end of the meeting on Wednesday, but they will pay close attention to the central bank's policy statement, Powell's remarks and, perhaps most importantly, an update day of the central bank's summary of economic projections, also known as a “dot plot.”

The dot plot reflects the individual policy expectations of Fed officials. Investors will want to see how many rate cuts they are pricing in. The latest dot chart, released in March, showed that policymakers, overall, expected cuts of three-quarters of a point in 2024.

Meanwhile, federal funds futures showed lingering hopes for a quarter-point rate cut at the Fed's July meeting all but evaporated after the jobs data , while also reflecting a lower likelihood of reductions later in the year. Fed funds futures show a roughly 50% prospect of a cut equivalent to two quarter points by the Fed's December meeting, according to the CME FedWatch tool.

It's also worth noting that despite Friday's jump, yields still saw weekly declines and have retreated significantly from late April highs, which saw the 10-year yield above 4.70% and the rate at 2 years above 5%.

Stock investors, meanwhile, appear less concerned about the exact timing of a rate cut, remaining confident in the prospects of a slight economic slowdown, or a “soft landing,” Ripley said.

And fears of a hard landing in the economy appeared to fade after a rebound in the Institute for Supply Management's May services sector PMI on Wednesday broke a string of weaker economic data provided that.

-William Watts

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06-08-24 1228ET

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