The rising US 10-year yield is having an impact on a wide range of investments.
Long-term yields can rise for reasons unrelated to the Fed, which should help maintain the US dollar strong.
The repercussions of Fitch’s reduction of the United States’ credit rating are still being weighed into Thursday’s volatility. The 10-year yield just hit a fresh high of 4.189%, just below the 4.33% recorded in 2022. Stocks and other risk assets are under pressure as a result, and US stock indices have just gapped down for a second session. However, the influence on the US dollar is smaller than in prior sessions. Following an early surge and new weekly high, the EURUSD and GBPUSD have now retraced, albeit they are still marginally higher on the day.
The big event of Thursday was the Bank of England meeting, which concluded as many predicted: the bank hiked rates by 25 basis points and signaled that future increases were possible if necessary. Even though some predicted a 50 basis point increase, the announcement only modestly weakened the British pound. Inflation and job numbers will be key considerations at the next meeting in September.
The number of Americans filing for unemployment benefits came in at 227k, virtually precisely as predicted, while the ISM Services PMI came in at 52.7, a number that was somewhat lower than anticipated. Since Manufacturing is already in the contraction zone, a slowdown in Services would be a major cause for concern for the economy. Some data is rolling over and may hurt confidence in the US economy, but hopes for a soft or even no landing (i.e. no recession) remain high.
Evidence from other areas keeps corroborating the view that the Federal Reserve has completed its cycle of rate hikes. Both headline and core inflation are declining at a rapid pace. This week’s Unit Labor Costs reading of 1.6% was significantly lower than forecasts of 2.5%. The labor market shows symptoms of slowing as well, and there would be little justification to keep increasing if Friday’s NFP is poor.
The report being out on Friday is anticipated to show a continuation of the recent downturn in hiring. The headline number is forecast to fall to 203k in July from June’s record-low 209k. This would be the lowest figure in over two years. The average earnings index is predicted to slow from 0.4% to 0.3%, which means wage growth will slow as well.
Assuming the release is weaker than expected, the US dollar may fall as a result of the downward pressure on short-term yields. However, the downgrading from Fitch and the belief that the Fed may maintain high rates for an extended period as the US economy remains robust are countercurrents to the movement in longer-term yields. The USD will remain in demand as long as long-term yields rise.
Earnings reports from Apple and Amazon, scheduled for release after the market closes on Thursday, will add to the chaos on Friday. Changes in these stocks can affect the mood of the entire US stock market.
Long-term yield movement, which is affecting multiple asset classes and global markets, will remain the primary driver despite NFP and heavyweight earnings. According to ING:
Stock markets and other risk assets are facing stronger headwinds as risk-free rates rise. More investors may decide to partially de-risk from carry trade tactics (which is good for the Japanese yen and Swiss franc on the crosses but bad for the high yielders) if we see somewhat higher readings of cross-market volatility.
