Bond Bears Emboldened as Jobs Data Fuel Fed Wagers: Markets Wrap

(Bloomberg) -- Wall Street got a dose of reality after a shockingly hot jobs report lifted bond yields and sent stocks lower on bets the Federal Reserve will keep tightening even if that means a recession down the road.

Rather than boosting their bets for the Fed’s December meeting, swap traders increased their wagers on where the central bank’s target will top out -- climbing to 4.98% -- up more than 10 basis points from where it was before the data. That’s from a current range between 3.75% and 4%.

Two-year US yields -- which are more sensitive to imminent Fed moves -- at one point was above 4.4%. The dollar wavered. The payrolls figures also threw cold water on a weekly rally for equities that was driven by Jerome Powell’s signals of a downshift in the pace of hikes.

US employers added more jobs than forecast and wages surged by the most in nearly a year, Nonfarm payrolls increased 263,000 in November. The unemployment rate held at 3.7% as participation eased. Average hourly earnings rose twice as much as forecast.

“To have 263,000 jobs added even after policy rates have been raised by some 350 basis points is no joke,” said Seema Shah at Principal Asset Management. “The labor market is hot, hot, hot, heaping pressure on the Fed to continue raising policy rates. What is there in this jobs report to convince them not to take policy rates above 5%?”

It’s indeed the Fed’s “dot plot”, which the central bank uses to signal its outlook for the path of policy, that’s in focus at the moment. Anna Wong at Bloomberg Economics says officials may have to boost their terminal-rate forecast from what they wrote down in the September, possibly to 5.25%.

Fed Bank of Chicago President Charles Evans said rates will need to be raised to a higher peak even as the central bank slows the pace of increases. His Richmond counterpart Thomas Barkin sees long-term labor constraint keeping inflation heat.

More Comments:

• Callie Cox at eToro:

A strong job market gives the Fed more basis to hold rates higher for longer, even if they start slowing hikes down. A high-rate environment is a challenging one to invest in, and we could be in for a tougher slog to the highs until inflation comes down significantly.

• Ronald Temple at Lazard Asset Management:

Investors need to reassess their optimism regarding the end of policy tightening – both the level of terminal rates, and how long the Fed keeps rates there.

• Chris Zaccarelli at Independent Advisor Alliance:

This jobs report is another example of why the Fed is going to be fighting inflation for a much longer period than many currently expect. Next year is likely to be a volatile one as a weakening economy and tight financial conditions is our base case.

• Krishna Guha at Evercore ISI:

We are confident that the report will have no effect on the decision to slow the pace of Fed rate hikes to 50bp in Dec. But it means the median Fed official will likely write down a peak rate of 5% to 5.25% rather than 4.75% to 5% and the Fed will maintain a hawkish tone at that meeting.

• David Russell at TradeStation Group.

The Fed also has to think about their credibility. After clearly signaling a turn away from 75 basis points, they’re unlikely to change that two weeks from now. Instead, we’ll probably see more hawkish projections on the dot plot.

Stock investors’ optimism around a cooling labor market and a Fed pivot is overdone, according to Bank of America Corp. strategists, who recommend selling the rally ahead of a likely surge in job losses next year. Their note was published before Friday’s jobs data.

“Bears (like us) worry unemployment in 2023 will be as shocking to Main Street consumer sentiment as inflation in 2022,” strategists led by Michael Hartnett wrote in a note showing that global equity funds just had their biggest weekly outflows in three months. “We’re selling risk rallies from here,” he said, reiterating his preference for bonds over equities in the first half of 2023.

Some of the main moves in markets:

Stocks

• The S&P 500 fell 0.7% as of 1:08 p.m. New York time
• The Nasdaq 100 fell 1.2%
• The Dow Jones Industrial Average fell 0.4%
• The MSCI World index fell 0.5%

Currencies

• The Bloomberg Dollar Spot Index was little changed
• The euro was little changed at $1.0528
• The British pound rose 0.3% to $1.2278
• The Japanese yen rose 0.5% to 134.64 per dollar

Cryptocurrencies

• Bitcoin was little changed at $16,944.56
• Ether rose 0.3% to $1,280.49

Bonds

• The yield on 10-year Treasuries advanced five basis points to 3.55%
• Germany’s 10-year yield advanced four basis points to 1.86%
• Britain’s 10-year yield advanced five basis points to 3.15%

Commodities

• West Texas Intermediate crude fell 0.9% to $80.45 a barrel
• Gold futures fell 0.3% to $1,809.70 an ounce

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