Bonds simmer as payrolls offer reality check

03:38 |

Morning Bid U.S.

A look at the day ahead in U.S. and global markets

By Mike Dolan, Editor-at-Large, Financial Industry and Financial Markets

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After a torrid start to the year for U.S. Treasuries and global sovereign bonds at large, Friday tests the 'hot economy' thesis by revealing just how tight U.S. labor markets still are as a new administration takes office in Washington this month.

The release on Friday of the U.S. December employment report ties up a variety of jobs market updates this week - with something of a mixed picture so far.

Today's Market News

A Wall Street sign hangs in front of a U.S. Flag outside the New York Stock Exchange (NYSE) before the Federal Reserve announcement in New York City, U.S., September 18, 2024. REUTERS/Andrew Kelly

The weekly jobless series released on Wednesday was a standout, as it indicated the lowest unemployment claims in eight months. November job openings also rose. But private sector payroll growth missed forecasts and Thursday saw data showing both hiring and layoffs slowed last month.

With the national payrolls report potentially a decider on all the above, consensus expectations are for jobs growth to have softened overall in December to some 160,000 - with an unemployment rate steady at 4.2%.

If that pans out, the Federal Reserve will likely feel justified with a stance of further cautious rate cuts ahead. Its policymakers have indicated just two more quarter point reductions for this year, even though futures markets price marginally less than that - some 41 basis points as of Friday and with the first 25bp not coming until June.

On Thursday, the latest Fed speakers tilted hawkish.

Kansas City Federal Reserve President Jeff Schmid signaled a reluctance to cut interest rates again. "I believe we are near the point where the economy needs neither restriction nor support and that policy should be neutral," Schmid said.

Fed governor and well-known hawk Michelle Bowman said she supported last month's interest rate cut as the "final step" in the central bank's monetary policy recalibration.

With Thursday's market closures for the funeral of former President Jimmy Carter acting as something of a firebreak in an anxious first full trading week of the year, long-dated Treasury yields remain elevated ahead of the payrolls report.

At 4.94%, the 30-year 'long bond' yield is still stalking 5% for the first time since October 2023, while 10-year benchmark yields at 4.70% remain near this week's 8-month highs.

Spurred in part by some extreme cold weather snaps across the Northern hemisphere, oil prices remain an aggravator and U.S. crude hit its highest since October.

The dollar index also remains pumped up near the two-year high set last week.

Uncertainty

With Wall Street stock markets closed on Thursday, futures there are slightly in the red ahead of Friday's reopening.

Of course the payrolls report addresses just one of the bond market concerns, with anxiety and uncertainty about the extent of President-elect Donald Trump's planned tax cuts, tariff hikes and immigration curbs still a wildcard.

But to the extent that any or all of those policy promises are inflationary - in an already sticky inflation environment - the employment report sets the tone ahead of Trump's inauguration on Jan. 20.

For stock markets, the focus on bonds may start to shift somewhat as the fourth-quarter earnings season gets underway - with S&P500 companies on aggregate expected to have clocked 10% profit growth last year and analysts pencilling a further 14% gain in 2025.

Delta Airlines, Walgreens Boots Alliance and Constellation Brands kick off the reporting season on Friday - with the big banks due next week.

For tech companies there was good news from Taiwan, with the world's largest contract chipmaker TSMC reporting fourth-quarter revenue that easily beat forecasts as it reaped the benefit of artificial intelligence demand.

Overseas, the bond market ructions have rippled across the world this week too - with Britain's government bond market in the crosshairs as 30-year gilt yields there hit 27-year highs and 10-year benchmarks reaching levels not seen since 2008.

Even though those gilt yield rises are largely just in line with what's happened in U.S. Treasuries a worrying development in the UK is that sterling has turned tail too and stopped following domestic yields higher.

Gilts remained on edge first thing Friday, but yields remained below the week's peaks and the pound recovered some ground from Thursday's 14-month low against the dollar.

Stocks in Asia were under pressure, with the main Chinese and Japanese indexes down more than 1% each.

Inflation numbers from China on Thursday showed the country still battling pervasive deflationary pressures.

China's central bank is expected to deploy this year its most aggressive monetary tactics in a decade as it tries to stimulate the economy and soften the blow of impending U.S. tariff hikes - but in doing so it risks exhausting its firepower.

Friday's announcement by the People's Bank of China that it has suspended treasury bond purchases due to the asset's scarcity highlighted the limitations of its resources as it confronts an increasingly challenging economic environment.

Key developments that should provide more direction to U.S. markets later on Friday:

US December employment report, University of Michigan January consumer sentiment survey, Canada Dec employment report
US corporate earnings: Delta Airlines, Walgreens Boots Alliance, Constellation Brands
Britain's finance minister Rachel Reeves will visit China

Graphics are produced by Reuters.

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