In a stunning turn of events, treasury yields soared, the dollar experienced a surge, and global equities rallied following a remarkable U.S. jobs report, effectively quashing any lingering expectations of an imminent interest rate cut and spotlighting a robust economy.
The U.S. Labor Department’s Bureau of Labor Statistics reported a staggering increase of 353,000 jobs in January, nearly doubling the forecast of 180,000 by economists polled by Reuters.
The benchmark 10-year Treasury note yield spiked above 4%, and the dollar strengthened against all major currencies. This rapid movement was triggered by employers adding significantly more jobs than anticipated, coupled with a 0.6% increase in average hourly earnings, surpassing December’s rise of 0.4%.
This data followed the Federal Reserve’s recent assertion against market expectations for an immediate rate cut. Fed Chair Jerome Powell warned that inflation remains “still too high,” challenging prevailing market sentiments.
“The market has been horribly wrong about the near-term trajectory of Fed policy, and this is another instance where that’s the case,” commented Kevin Gordon, senior investment strategist at Charles Schwab in New York. He highlighted the market’s correct assessment of the inflationary backdrop setting conditions for future Fed cuts.
While employment growth had been slowing, especially in the fourth quarter of the previous year, the jobs report revealed a significant acceleration in job creation. Joseph LaVorgna, chief U.S. economist at SMBC Nikko Securities America, noted the absence of pockets of weakness in the report, emphasizing its overall strength and dispelling imminent recession concerns.
Global equities, as measured by MSCI’s gauge, surged by 0.64%. On Wall Street, the tech-heavy Nasdaq and benchmark S&P 500 climbed 1.74% and 1.07%, respectively. Investors celebrated robust quarterly results from Meta Platforms and Amazon.com. The Dow Industrials experienced more modest gains, rising by 0.35%, reflecting optimism about low unemployment and a robust economy, supporting potential increases in corporate earnings.
Meta Platforms witnessed an extraordinary 20.3% surge, reaching a record high after issuing its first dividend just days ahead of Facebook’s 20th anniversary. Additionally, Meta reported revenue and profit beats on advertising sales during the holiday shopping period.
U.S. regional bank stocks recovered slightly from a significant sell-off triggered by concerns about New York Community Bancorp’s poor earnings, which signaled broader issues for the sector. NYCB shares rebounded by 5.0% after a nearly 45% plunge over the previous two sessions, following the lender’s dividend cut and a surprise loss on commercial real estate loans.
In Japan, Aozora Bank faced a three-year low after making a substantial loan-loss provision against U.S. office loans.
Following the jobs report, money markets projected that the Fed would lower its target rate, currently in the range of 5.25%-5.5%, by 123.8 basis points by year-end. This marked a reduction from the 140.3 bps projection just before the release of the data.
Futures shifted expectations for a rate cut in March to 20.5%, down from 36.5% before the report. The likelihood of a 25 or 50 bps cut in May also diminished, dropping to 61.8% from 91.6%, according to CME Group’s FedWatch Tool.
“I’ll trade a stronger economy with fewer rate cuts than a weaker economy with more rate cuts,” emphasized Keith Lerner, chief market strategist at Truist Wealth in Atlanta.
The two-year Treasury yield, indicative of interest rate expectations, surged by 17.6 basis points to 4.370%, while the 10-year yield rose by 16.5 basis points to 4.028%. The two-year’s gain was on track to be the most substantial one-day increase since May 2023, and the 10-year’s since July 2023.
Investors seemingly brushed off a notable Chinese market selloff, attributed to a lack of anticipated government stimulus. The blue-chip CSI300 reached a five-year low, with the Shanghai Composite 1.5% lower on the day and down 6.2% for the week, marking its most extensive weekly loss since October 2018.
The dollar index, measuring the U.S. currency against six others, soared to a seven-week high with a 0.83% increase, while the euro declined by 0.74% to $1.0792. The yen weakened by 1.24% to 148.29 per dollar.
Oil prices faced a 2% decline following the U.S. jobs data, reducing the likelihood of imminent rate cuts that could potentially dampen crude demand due to restrictive monetary policy impacting the economy.
U.S. crude futures settled at $72.28 a barrel, down by $1.54, while Brent fell by $1.37 to settle at $77.33. Both benchmarks posted losses of more than 7% for the week.
Gold prices experienced a decline as the dollar strengthened, making bullion more expensive for overseas buyers. Additionally, higher yields diminished the appeal of non-interest-bearing gold. U.S. gold futures settled 0.8% lower at $2053.70 an ounce.
The remarkable turn of events in response to the U.S. jobs report underscores the market’s sensitivity to economic data, influencing global financial dynamics in unexpected ways.
