Global Bonds Steady as Traders Analyze US Data and Predict Federal Reserve’s Interest Rate Decisions
Global bond markets experienced stability on Wednesday as traders closely examined the latest US data and increased their bets that the Federal Reserve would refrain from implementing further interest rate increases. The 10-year Treasury yields remained lower throughout the day after reaching a high of 4.88% earlier in the session. Traders are currently pricing in a less than one-in-five chance of an interest rate hike in November, down from the previous one-in-three probability. Concurrently, stock markets were unstable, with the S&P 500 expected to continue its recent decline to a four-month low. However, large-cap tech companies like Microsoft and Amazon contributed to gains in the Nasdaq 100 index.
The US job market showed signs of slowing down in September, as companies added the fewest number of jobs since the beginning of 2021. Private payrolls rose by 89,000 last month, compared to an increase of 180,000 in August, according to a survey conducted by the ADP Research Institute in collaboration with the Stanford Digital Economy Lab. Additionally, the Institute for Supply Management’s services index modestly declined in September to a reading of 53.6, which represents the lowest level recorded this year. However, it is important to note that readings above 50 indicate expansion.
Stock investors have been hoping for signs of the labor market loosening up, providing the Federal Reserve with enough room to reduce its hawkish approach. Mike Loewengart, the head of model portfolio construction at the Morgan Stanley Global Investment Office, stated that while ADP’s data is not necessarily a reliable predictor of the government’s monthly jobs report, if Friday’s report confirms a cooling labor market, investors may worry less about potential long-term interest rate hikes.
The S&P 500 has officially entered oversold territory based on its relative strength index, with a reading below 30. Francisco Simón, the European head of strategy at Santander AM, believes this could be an opportunity for investors to consider sectors and companies that are highly sensitive to interest rates. Simón hopes that these assets will regain their value once rates stabilize, as current yields are deemed high for expected inflation and long-term growth.
The recent selloff in global bond markets has been primarily fueled by better-than-expected US job data released on Tuesday, as well as a series of hawkish comments from Federal Reserve officials. As the market becomes increasingly convinced that US interest rates may rise further from their current 22-year highs, yields on 30-year Treasury bonds reached 5% for the first time since 2007.
Uncertainty regarding the direction of interest rates is expected to contribute to a volatile environment in the market until more clarity is provided. According to Virginie Maisonneuve, the global chief investment officer for equities at Allianz Global Investors, investors with a long-term time horizon should focus on stocks with strong structural backing for growth and solid balance sheets.
Key events to watch this week include China’s week-long holiday, the US ISM services index, France’s industrial production data, and speeches by central bank officials. Investors should also pay attention to US trade figures, initial jobless claims, and economic speeches by San Francisco Fed President Mary Daly. Germany’s factory orders, as well as the US unemployment rate and nonfarm payrolls data, will also be important indicators of market trends.
In terms of market movement, the S&P 500 remained relatively unchanged, while the Nasdaq 100 rose by 0.5%. Conversely, the Dow Jones Industrial Average fell by 0.3%, and the Stoxx Europe 600 and MSCI World index both experienced declines of 0.4%.
Regarding currencies, the Bloomberg Dollar Spot Index remained relatively stable, while the euro and the British pound rose by 0.3% against the US dollar. The Japanese yen, however, saw minimal change at 148.96 per dollar.
Cryptocurrencies experienced minor fluctuations, with Bitcoin falling by 0.2% to $27,349, and Ether declining by 1.6% to $1,631.
In the bond market, the yield on 10-year US Treasuries decreased by two basis points to 4.77%. Meanwhile, Germany’s 10-year yield remained unchanged at 2.97%, and Britain’s 10-year yield advanced by four basis points to 4.63%.
Finally, in the commodities market, West Texas Intermediate crude oil fell by 3.5% to $86.11 per barrel, and gold futures declined by 0.3% to $1,836.30 per ounce.
This article was produced with the assistance of Bloomberg Automation and included contributions from Macarena Muñoz, Sujata Rao, Michael Msika, and Tatiana Darie.
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