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A look ahead at Stella Qiu’s European and global markets
Most Asian shares fell on Friday, led by Wall Street futures, ahead of a key payrolls report, which could further boost Treasury yields and the US dollar.
Both Nasdaq and S&P 500 futures fell 0.3%, after US trading was closed overnight to mark the funeral of former President Jimmy Carter. European stock markets seem poised for a flat opening.
This likely reflects distress in global bond markets. The benchmark 10-year Treasury yield is just off an eight-month high of 4.73% and threatens a major level on the chart at 4.739%. The 30-year yield rose 11 basis points this week to the highest in more than a year.
British government bond yields soared to their highest since 2008 as investors weighed the country’s fiscal outlook, although they have eased somewhat for now.
Even China’s bond yields rose on Friday, after the country’s central bank said it will temporarily suspend purchases of Treasury bonds. The reason offered was a paper shortage, but analysts suspected it was aimed at propping up the yuan.
The payrolls report, where average forecasts favor an increase of 160,000 jobs in December, with an unemployment rate of 4.2%.
Forecasts are in a relatively tight range of 120,000 to 200,000, suggesting more room for an outside surprise. There is an additional wrinkle from the annual reanalysis of the household survey, which could see the unemployment rate revised downward over the past few months.
A surprisingly strong report is likely to push 10-year yields past 4.739%, with bears yearning for the psychologically important 5% level, highs not seen since 2007.
That would boost the already strong US dollar, which is near two-year highs and wreaking havoc on emerging markets.
The stock market reaction could also be negative as high valuations are challenged by a rising term premium and higher discount rates.
So investors better pray for a soft report, but not so soft that it jeopardizes the golden bouquet scenario for the US economy.
Then again, it would probably have to be an extremely weak report to turn the dial on Fed rate cuts, given that investors and the Fed are now more focused on how Trump’s policies might play out over the coming months .
Markets have already returned to just 43 basis points of easing this year, the equivalent of less than two rate cuts, with the first of those not fully priced in until June, when the impact becomes more apparent potential of Trump’s proposals.
